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Embracing the Knowledge Economy
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NEW HORIZONS IN THE ECONOMICS OF INNOVATION Series Editor: Christopher Freeman, Emeritus Professor of Science Policy, SPRU – Science and Technology Policy Research, University of Sussex, UK Technical innovation is vital to the competitive performance of firms and of nations and for the sustained growth of the world economy. The economics of innovation is an area that has expanded dramatically in recent years and this major series, edited by one of the most distinguished scholars in the field, contributes to the debate and advances in research in this most important area. The main emphasis is on the development and application of new ideas. The series provides a forum for original research in technology, innovation systems and management, industrial organization, technological collaboration, knowledge and innovation, research and development, evolutionary theory and industrial strategy. International in its approach, the series includes some of the best theoretical and empirical work from both well-established researchers and the new generation of scholars. Titles in the series include: Innovation and Small Enterprises in the Third World Edited by Meine Pieter van Dijk and Henry Sandee Innovation, Growth and Social Cohesion The Danish Model Bengt-Åke Lundvall The Economics of Power, Knowledge and Time Michèle Javary Innovation in Multinational Corporations in the Information Age The Experience of the European ICT Industry Grazia D. Santangelo Environmental Policy and Technological Innovation Why Do Firms Adopt or Reject New Technologies? Carlos Montalvo Corral Government, Innovation and Technology Policy An International Comparative Analysis Sunil Mani Innovation Networks Theory and Practice Edited by Andreas Pyka and Günter Küppers Systems of Innovation and Development Evidence from Brazil Edited by José E. Cassiolato, Helena M.M. Lastres and Maria Lucia Maciel Innovation, Competence Building and Social Cohesion in Europe Towards a Learnng Society Edited by Pedro Conceição, Manuel V. Heitor and Bengt-Åke Lundvall The Dynamics of Innovation Clusters A Study of the Food Industry Magnus Lagnevik, Ingegerd Sjöholm, Anders Lareke and Jacob Östberg Technological Systems and Intersectoral Innovation Flows Riccardo Leoncini and Sandro Montresor Inside the Virtual Product How Organisations Create Knowledge Through Software Luciana D’Adderio Embracing the Knowledge Economy The Dynamic Transformation of the Finnish Innovation System Edited by Gerd Schienstock
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Embracing the Knowledge Economy The Dynamic Transformation of the Finnish Innovation System
Edited by
Gerd Schienstock Research Professor and Scientific Director, Work Research Centre University of Tampere, Finland
NEW HORIZONS IN THE ECONOMICS OF INNOVATION
Edward Elgar Cheltenham, UK • Northampton, MA, USA
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© Gerd Schienstock 2004 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA
A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Embracing the knowledge economy : the dynamic transformation of the Finnish innovation system / edited by Gerd Schienstock. p. cm.— (New horizons in the economics of innovation) Includes index. 1. Knowledge management—Finland. 2. Information technology—Economic aspects—Finland. 3. Technological innovations—Economic aspects—Finland. 4. Industrial policy—Finland. 5. Finland—Economic policy. I. Schienstock, Gerd. II. Series. HD30.2.E46 2004 303.48'33'094897—dc22 2003055843
ISBN 1 84376 307 9 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
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Contents List of figures List of tables List of contributors Preface List of abbreviations PART I
vii ix xi xii xiv
CONCEPTUAL ASPECTS
1 From path dependency to path creation: A new challenge to the systems of innovation approach Gerd Schienstock 2 Towards a theory of social innovation and structural change Timo Hämäläinen PART II
28
INDUSTRIES AND FIRMS
3 The evolution of the Finnish ICT cluster Laura Paija and Petri Rouvinen 4 Innovation and absorptive capability in the traditional industries: The case of the Finnish wood products industry Christopher Palmberg 5 Knowledge services in the Finnish innovation system Aija Leiponen 6 Nokia: A giant in the Finnish innovation system Jyrki Ali-Yrkkö and Raine Hermans 7 The flexible production model in Finnish companies: Trends in production management, work organization and employment relations Tuomo Alasoini PART III
3
47
65 85 106
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REGIONS AND INSTITUTIONS
8 The emergence of a regional innovation network: BioTurku in Turku, Finland Henrik Bruun v
147
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9 From the national industrial heartland towards a node in the global knowledge economy: The case of Tampere Region Mika Kautonen, Pasi Koski and Gerd Schienstock 10 Universities and science-industry relationships: Making a virtue out of necessity? Mika Nieminen and Erkki Kaukonen 11 Polytechnic reform: A response to the learning economy Kari Kekkonen 12 Education as an asset in the labour market Asko Suikkanen and Ritva Linnakangas 13 Regulation and innovation: Competition law Kalle Määttä 14 Finnish science and technology policy Tarmo Lemola PART IV
169
196 219 242 254 268
THE NATIONAL LEVEL
15 The Finnish model of the knowledge economy Gerd Schienstock
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Index
315
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Figures 2.1 3.1 3.2 3.3 3.4 3.5 4.1 4.2 5.1 5.2 6.1 6.2 6.3 6.4 6.5 6.6 9.1 9.2 9.3 9.4 9.5 9.6
Social innovation process 30 ICT sector value added, employment and R&D 48 ICT cluster framework 49 Development of the ICT cluster versus the economy as a whole 1990–2001 53 Export shares by industry group 53 Tekes funding to Nokia: Volume (millions of euros at 2000 prices) and share of Nokia’s R&D (%) 57 Contribution of different industries to the volume of production of the Finnish manufacturing sector 1995–2001 (ETLA database) 66 The product segments of the Finnish wood products industry in 2000 70 Dimensions of organizational knowledge 92 Operationalization of knowledge in the service firm 92 Tekes funding and its share of Nokia’s total R&D expenditure 108 Share of Tekes financing in all its company projects and Nokia projects 109 Nokia’s R&D personnel in Finland and abroad 110 Nokia’s co-operation network in Tekes’ ETX and TLX programmes 115 R&D expenditures relative to GDP (%) 121 Monetary value flows between Nokia and the public sector in Finland 1995–2000 (at 2000 prices) 124 Selected indicators of regional development in Finland, 1999 171 Industrial production in various sectors in Tampere Region in 2000 (%) 173 Changes in Tampere Region’s share of workforce and value added, of Finland as a whole, 1995–2000 (%) 174 Share of companies having frequent (Likert-5, values 4–5) co-operation with some selected universities or research institutes 179 Changes in R&D expenditure shares by region between 1995 and 2000 (%) 180 Domestic patent applications filed by business enterprises in Finland by inventor’s address by region 1995–2001 (%) 181 vii
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Share of companies located in Tampere Region having frequent (Likert-5, values 4–5) co-operation with selected intermediary and financing organizations 184 9.8 Development of total turnover in industries belonging to the Tampere Region Centre of Expertise Programme, 1995–2000, index 186 9.9 The regional innovation system environment in Tampere Region 187 9.10 Companies’ views of their own competitive strengths in Tampere Region 189 11.1 The Finnish VET reform in the 1990s 225 11.2 Finnish education system 229 11.3 A framework for network analysis of VET institutions: Actors and forms of interaction 231 11.4 Working-life-related theses 232
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Tables 2.1 Structural competitiveness of nations in the new techno-economic paradigm 2.2 Mental and structural change in Finland during the 1980s and 1990s 5.1 Service firms’ strategic choices 5.2 Descriptive statistics of main survey variables 5.3 Service firms’ contracts with key clients 5.4 Knowledge resources in KIBS industries (survey means) 5.5 Mean indicators of Finnish KIBS industries’ service development activities 5.6 Means of a set of variables concerning KIBS firms, for different values of the control rights variable 5.7 Means of independent variables for innovators, non-innovators 6.1 Nokia’s most important partner universities by country, 2001 7.1 Different types of corporate co-operation agreements in Finnish industry (%) 7.2 Opportunities for influencing one’s own work in Finland (%) (proportion of those who can influence ‘a lot’ or ‘quite a lot’) 7.3 Delegation of responsibility, teamwork and job rotation in the Nordic countries (%) (proportion of workplaces with 50 employees or more which responded positively) 8.1 Indicators of regional performance in biotechnology-related research 9.1 Types of innovation networks among firms in Tampere Region (%) 9.2 Changes in employment in different sectors 1970–1998 (%) 10.1 External funding of university research by source 1991–2000 (%, at 2000 prices) 11.1 Concepts of learning and knowledge in the framework of formal education 11.2 Supply of education in upper secondary and higher education in Finland 1999 12.1 The share of Finnish people in normal employment calculated with reference to different groups ix
35 41 88 89 90 94 97 98 99 119 133 136
137 154 189 191 202 222 230 244
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12.2 The development of employment according to educational levels in the years 1988–1997 in Finland 245 12.3 The proportion of the Finnish labour force (excluding entrepreneurs) in normal employment by level of education in the years 1990, 1993, 1995 and 1998 246 12.4 The incidence of unemployment in the Finnish labour force by level of education in the years 1990, 1993, 1995 and 1998 247
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Contributors Alasoini, Tuomo, Ministry of Labour, Finland Ali-Yrkkö, Jyrki, Research Institute of the Finnish Economy ETLA, Finland Bruun, Henrik, Helsinki University of Technology, Finland Hämäläinen, Timo, Finnish National Fund for Research and Development Sitra, Finland Hermans, Raine, Research Institute of the Finnish Economy ETLA, Finland Kaukonen, Erkki, University of Tampere, Finland Kautonen, Mika, University of Tampere, Finland Kekkonen, Kari, University of Tampere, Finland Koski, Pasi, University of Tampere, Finland Leiponen, Aija, Cornell University, USA Lemola, Tarmo, Advansis Oy, Finland Linnakangas, Ritva, University of Lapland, Finland Määttä, Kalle, University of Joensuu, Finland Nieminen, Mika, University of Tampere, Finland Paija, Laura, Research Institute of the Finnish Economy ETLA, Finland Palmberg, Christopher, Research Institute of the Finnish Economy ETLA, Finland Rouvinen, Petri, Research Institute of the Finnish Economy ETLA, Finland Schienstock, Gerd, University of Tampere, Finland Suikkanen, Asko, University of Lapland, Finland
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Preface This book reflects to a great extent work pursued in the Research Programme on the National Innovation System in Finland launched by Sitra (The Finnish National Fund for Research and Development). The aim of the book is to give a broad overview of the Finnish Innovation System and its recent development trends. Of course, while the various articles cover a great number of aspects, we cannot claim to present a full picture. This is partly due to the fact that the system model itself is a rather vague concept. Instead of aiming for completeness, we have integrated a great variety of different levels of analysis. For example, two articles in the book deal with various organizational aspects on the firm and inter-firm level, which has not been a focal area of research so far. We have put great emphasis on the institutional level, including among others, labour market aspects and competition law. Some of these institutional aspects are not always dealt with in standard textbooks. To include the industrial level goes without saying, as Finland is the most specialized country in telecommunications. In addition, we have included traditional industries and the emerging sector of knowledge-intensive business services. But Finland also provides some examples of successful regional specialization processes, as the two articles on Tampere Region and Turku Region demonstrate. Last but not least, we have included an article on Finnish science and technology policy, which created a favourable environment for the emerging knowledge economy. The title of the book reveals that a dynamic analysis is pursued. The aim is to demonstrate Finland’s capability to create a new knowledge-based national development path, in a country that in the 1980s was known as a forest economy. Finland is one of the very few countries that managed to catch up with the most advanced industrial countries within a very short period of time. By applying a systemic transformation approach, Finland has become a leading country in the new knowledge paradigm. This was achieved without major cutbacks in the highly developed welfare state. Due to this very balanced development, Finland is described as a specific model of the knowledge society, being monitored very closely by other countries. The intention of the dense description of the Finnish innovation system was not, however, to present a model that could be copied easily by other countries. During the last few decades we have seen too many models, such as the Japanese and German ones, which have failed in the end. The book can be seen, however, as a contribution to reflexive benchmarking. This means that by reflecting on the xii
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solutions Finland has developed for specific problems and fields of the innovation system, other countries may be able to gain a better understanding of their own solutions, their strengths and weaknesses. Finland is definitely a good example of successful reflexive benchmarking, as many of its institutions and political processes have been developed in the light of solutions in other countries. The authors who have participated in the book share an interest in the national systems of innovation approach. But they also share the view that the approach is often applied in a rather narrow sense. There is a need to take more seriously the open character of the innovation system, which means that research needs to focus more on relationships and interactions of the innovation system with other economic and social subsystems. As innovation and learning is not necessarily a positive-sum game, more attention needs also to be given to the negative aspects of a high innovation dynamic. Finland, with its still rather high unemployment rate, can also be seen as an example of the fact that the transformation into a knowledge society does not take place without serious social problems. Therefore innovation can no longer be associated with economic growth only; instead it needs to be recognized also as a means with which to solve social and ecological problems. This implies that more emphasis has to be given to non-technical innovations, including social, organizational, service and regulatory innovations. The broadening of the innovation concept implies a great challenge for innovation policy and governance. The traditional idea of a sequential policy process, which first concentrates on supporting innovation processes and afterwards deals with the negative consequences, can no longer be applied. Policy-makers, being confronted with large-scale changes, have to deal with the various problems simultaneously, which demands cross-departmental co-operation and a highly flexible political system. This book would not have been possible without Sitra’s Research Programme on the National Innovation System in Finland, as most of the articles rely on material collected in this programme. Therefore Sitra deserves to be mentioned as the initiator of the book. I also thank the Work Research Centre and the Research Institute for Social Sciences, University of Tampere, for financial support for this publication. Also, Marjukka Virkajärvi has continuously accompanied the process of the book’s production and has produced the final manuscript. Joan Lofgren has taken on the function of checking the language of the various articles. Both should be thanked for their patience in the preparation of the book. Dymphna Evans of Edward Elgar Publishers should be thanked for her encouraging support for the project. And what would have happened without Annikki’s loving support in the sometimes very stressful process of editing this book? Gerd Schienstock Tampere, Finland March 2003
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Abbreviations AGIL
Adaptation Goal Attainment Integration Latency Function and Pattern Maintenance Scheme AMKOTA A statistical database of the polytechnic system maintained by the Finnish Ministry of Education ASIC Application-specific integrated circuit CERN European Organization for Nuclear Research CRST Clinical Research Services Turku DCC Data City Centre EEDCs Employment and Economics Development Centres EFTA European Free Trade Association EIRA European Industrial Regions Association ESA European Space Agency ESF European Social Fund ERDF European Regional Development Fund ETLA The Research Institute of the Finnish Economy EU European Union ETX Electronics for the Information Society FDI Foreign Direct Investment FISPA Finnish Science Park Association GDP Gross domestic product GNP Gross national product GSM Groupe Spéciale Mobile, later Global System for Mobile Communications GSM MoU GSM memorandum of understanding HE Hallituksen esitys (government bill, Finland) HSE Helsinki Stock Exchange ICTs Information and communications technologies IPR Intellectual property rights ITU International Telecommunications Union KIBS Knowledge-intensive business services KM Komitean mietintö (Committee Report, Finland) KOTA A statistical database of the university system maintained by the Finnish Ministry of Education LAN Local area network LVL Laminated Veneer Lumber xiv
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Abbreviations
MNCs MTI NAFTA NIS NMT OECD OKO PTO PreFA R&D RJV RPM S&T Sitra SME Tekes TLX TTC TUT UK USA UMTS UTA VET VC VTT WLAN 3G
xv
Multinational companies Ministry of Trade and Industry North American Free Trade Association National Innovation System Nordiska Mobiltelefongruppen Organisation for Economic Co-operation and Development A venture capital consortium led by a private OKO Bank Group Public telecom operator Preclinical Pharmacology Research Unit, University of Turku Research and development Research joint venture Resale price maintenance Science and technology The Finnish National Fund for Research and Development Small and medium-sized enterprise The National Technology Agency of Finland Telecommunications: Creating a Global Village Turku Technology Centre Tampere University of Technology United Kingdom United States of America Universal Mobile Telecommunication System University of Tampere Vocational education and training Venture capital Technical Research Centre of Finland Wireless local area network Third generation mobile technology
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PART I
Conceptual aspects
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1. From path dependency to path creation: A new challenge to the systems of innovation approach Gerd Schienstock 1.1
INTRODUCTION
There is wide agreement that we are currently living through a period of fundamental and rapid economic transformation. Not only single elements of national economies are becoming the target of restructuring; instead the way the whole system is organized is changing. The ICT revolution is being given an important role in the transformation process; at the same time not only the established best practices of designing intra- and inter-organizational production processes, but also the existing institutional support structures, the functioning of political systems and even national cultures are fundamentally changing. Of course the fact of fundamental change also has major implications for research on techno-economic development and national systems of innovation. While up to now the systems approach concentrated mainly on the aspect of path dependency where the dominant feedback loops are self-reinforcing, in the current period research has to focus more on processes of unlocking and path creation (Garud and Karnoe 2000). The aim of this chapter is to contribute to such a re-conceptualization of the national systems of innovation framework. At the same time the chapter will raise some methodological problems and will point to some substantive aspects, which are dealt with in the following chapters of the book. Finland provides a good example of the successful creation of a new national development path, having been able to transform its resourcebased economy into a knowledge-based one (Castells and Himanen 2001). In the following section I will briefly discuss the traditional path dependency perspective and will take up the ‘lock-in’ phenomenon. The major part of the chapter is devoted to the development of a conceptual framework with which to analyse processes of path creation. I understand the development of a new national development path as the result of an interaction between socioeconomic pressures, critical change events, and endogenous change processes. The chapter will also deal with changes in the functioning of the political system 3
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as part of the creation of a new path. In the second part of the chapter I will give a short overview of the other chapters of the book.
1.2
THE PATH DEPENDENCY PERSPECTIVE AND THE PROBLEM OF ‘LOCK-INS’
The strength of the path dependency perspective is that it does not separate technological innovation from past developments, but assumes some kind of continuity in the process of technological change. New innovations line up with earlier technological changes; they have historical antecedents of novelty (David 1985, 332). Today’s technological advantages, as Foray argues, lay the foundation for succeeding rounds of progress (1997, p. 65). In other words, knowledge generation produces ‘positive externalities’; the more a specific kind of knowledge has been produced and is embodied in new product and/or process technologies, the easier it becomes to produce even more related knowledge, a phenomenon which is characterized as the ‘increasing returns logic’ (Arthur 1996). Continuous accumulation of knowledge leads to the formation of a technological trajectory, which delimits the options for further development. The concept of trajectory expresses the idea of channelled change, a change limited by constrained technological opportunities (Metcalfe 1997). In this respect, we can speak of the path dependency of technological development (David 1985). Path dependency embodies strong prescriptions about which direction of technological change should be pursued and which should be neglected. There is evidence that institutional differences across countries play a crucial role in shaping technological change (Lundvall 1992; Nelson 1993). The distinction between a general technological paradigm on the one hand and various national trajectories (Dosi 1982) or development paths on the other hand underlines the argument that technological development is not determined by a specific scientific or technological logic but that there is room for social structures and critical incidents as well as social choices to shape its direction. While the cumulative nature of the process of technological development narrows down the range of potential choices, national trajectories increase differentiation and diversification as offshoots from the main development path (OECD 1992). The concept of path dependency therefore provides us a way of viewing innovation activities as being temporally located and socially embedded (Garud and Karnoe 2000). While Dosi puts the technological dimension of national development paths at the forefront, Kogut (1991) among others expresses the idea that countries also differ in their organizational arrangements, which, according to the author,
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tend to persist for a long time. Taking up this argument, Castells suggests considering – parallel to the notion of technological trajectories – ‘the development of different organizational trajectories, namely specific arrangements of systems of means oriented towards increasing productivity and competitiveness in the new technological paradigm and in the global economy’ (1997, p. 153). Organizational change is channelled in the same way by the national institutional framework as technological innovations; it is as difficult to transfer organizational innovations from one economic system to another (Hämäläinen 2003; Strambach 2001).1 The idea of an organizational trajectory points to the importance of nontechnical aspects in the process of economic development. However, in what way technological and organizational trajectories are related to each other is still highly controversial. While Pavitt (2000) seems to support the position of technological determinism, other authors argue that technology has to be adapted to the needs of the emerging new organization model (Brousseau and Rallet 1998). Independent of whether we assign technology a leading role in the transformation process or not, it is important to understand the interaction and processes of mutual influence taking place between technological and organizational changes in a fundamental transformation process.2 A well-established techno-organizational paradigm, as the concept of national trajectories assumes, tends to form a synergistic combination with the society’s institutional structure.3 According to Freeman and Perez (1988), the synergistic complementarities among technological, organizational and institutional paradigms provide a sound basis for long-term economic growth. As the prevailing norms, values and policies are continuously reinforced by the positive experiences and feedback stemming from the evolutionary phases of technological, organizational and institutional development, people tend to have internally consistent ‘mental sets’ similar to each other. We may speak of a ‘mental paradigm’ shared by most economic actors (Hämäläinen in this volume). Path dependency, however, always carries the risk of turning into a so-called ‘lock-in’ (Grabher 1993; Johnson 1992). An old technology, but also a traditional organization model can lock the economy of a country into an inferior option of development and may in the long run result in a loss of competitiveness and the retarding of economic growth. Path dependency from a firm’s perspective implies that it has developed a degree of commitment to the setting up of learning mechanisms with the aim of exploiting particular technological and organizational opportunities. The commitment to a specific learning structure and associated competencies can explain a company’s inability to adjust to an emerging new design configuration based on a different knowledge paradigm (Metcalfe 1997). From a regional or national perspective we may distinguish between a ‘structural’, a ‘political’ and a ‘cognitive’ lock-in (Grabher 1993). A ‘structural
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lock-in’ exists when most of the resources of an economy are bound to one or only very few technologies, and when the organizational and institutional setting is mainly tied to this technology, which leaves no room for diversification and the development of new technological paths. We may talk about a ‘political lock-in’ when the dominating power structures have a vested interest in the dominant techno-organizational path and resist changes. Finally, we can speak of a ‘cognitive lock-in’ if economic actors, because of earlier success, continue to adhere to the existing national development path even if it can no longer ensure global competitiveness and economic growth. Under the conditions of a shift in the techno-organizational paradigm we can no longer talk about a channelled change, as the institutional setting in which the traditional trajectory was embedded becomes itself increasingly fragile. The unfolding of a new technological paradigm within national trajectories can only take place, as Perez argues (1983; see also Freeman 1987), together with not only fundamental organizational, but also institutional and cultural changes. It is likely that the institutional and cultural framework, which is hospitable to one set of technologies and/or organizational forms, will not be suitable for radically new ones. Whereas incremental innovations can be accommodated easily, this may not be the case with fundamental technoorganizational changes, which by definition involve an element of destruction. The negative economic consequences of a technical and/or organizational ‘lockin’ suggest giving more attention to the problem of unlocking and path creation (Garud and Karnoe 2000).
1.3
NEW OPPORTUNITIES, ECONOMIC PRESSURES, AND CHANGE EVENTS
The transformation of a new techno-organizational paradigm into a national trajectory is not an easy task; it cannot be explained by referring to single factors or simple models. Instead it emerges out of the interaction between general economic forces, change events and courses of action within the system. In the following I will first focus on external aspects of path development. The existence of ‘a window of new opportunities’, opened up by an emerging new techno-organizational paradigm, is decisive for the creation of a new development path. Currently the emerging information and communication technology (ICT) paradigm, based on a constellation of radical innovations in computers, electronics and telecommunications, is opening up a new window of technological opportunities (Freeman 1987; OECD 1988). At the same time, we can identify the development of a new organizational paradigm represented by the network model, providing opportunities to signif-
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icantly increase the efficiency of the production process (Castells 1997). The new network paradigm also includes new work regulations based on the idea of flexibility and self-regulation. A kind of symbiosis exists between the new technical and the new organizational paradigm, as the OECD among others argues (1998). We can only gain from the new technological paradigm if together with the wide use of modern ICT we also introduce new organization forms based on the network paradigm (ibid.). The two paradigms combined can become the basis of a new national trajectory incorporating a production logic that is much more effective than the old one. Companies and countries, however, will not automatically make use of the window of new technological and organizational opportunities. These new opportunities do not trigger major transformation processes themselves, as they are associated with high uncertainty and generally entail nothing more than a promise. Countries may therefore differ with respect to speed, extent and substance in their attempt to realize the advantages of the new paradigm. Economic globalization is a very important factor that drives countries to undertake a fundamental transformation influenced by the new techno-organizational paradigm, as globalization not only contributes to the stiffening of competition, but also establishes new rules and criteria of the competition game. In a globalizing economy companies as well as countries can no longer expect that their successful products and production practices of the past will keep them viable in the future. Instead they have to look for new opportunities to stay ahead in harsh global innovation competition. Still, leadership in the old paradigm may be an obstacle to the swift diffusion of the new one, as leading countries may feel less pressured to fundamentally change their successful national development path due to earlier success. They may also hesitate to undertake major changes as they are bound to the traditional development path, which has absorbed most of the available resources (Dosi, Pavitt and Soete 1990). In addition institutions have some kind of natural inertia strengthened by past successes and vested interests. Countries having fallen behind in the old techno-organizational paradigm on the other hand may take the opportunity to catch up with the leading countries in the emerging new paradigm and even to bypass them more eagerly. However, as radical, growth-enhancing innovations become increasingly difficult to make along the established techno-organizational trajectories, the leading countries in the old paradigm may increasingly suffer from ‘decreasing returns on investment’ and may therefore also feel forced to adapt to the new paradigm. It can be argued that only when lagging behind in the new emerging paradigm results in a serious economic crisis do countries feel pressured to undertake more fundamental changes and to adapt to the new techno-organizational paradigm. A serious economic crisis is often mentioned as an important ‘change event’ that can trigger fundamental and path-creating transformation
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processes. In an economic crisis it may become riskier for companies as well as countries to stay put than to move, even if it is in the wrong direction (Sabel 1995). Under these circumstances economic actors are forced to take high risks to survive and stay in the market. Therefore an economic crisis is not only destructive but it may also be functional from the viewpoint of creating a new development path.
1.4
ENDOGENOUS CHANGE PROCESSES
It is quite obvious that the development of a new national development path cannot be explained by referring only to objective factors such as new technological and organizational opportunities, general economic forces and major change events. Instead we have to emphasize the importance of the human will (Bassanini and Dosi 2000). But under the threat of a fundamental change, people often develop cognitive rigidity, which gets them to stick to the old technoorganizational trajectory and the embedding traditional institutional setting. Only if this ‘cognitive lock-in’ is broken open successfully can the transformation process get well under way. As Perez (1997) puts it: ‘a shift in “common sense” about the efficiency principles in an economy is necessary for the new paradigm to make its way into business reality’. The change from the traditional to the new paradigm is of course a very complex and often contradictory process; along the way to the new paradigm very many stumbling blocks are to be expected. An understanding of the characteristics of the new paradigm offers the best criteria for guiding social and institutional creativity in viable direction (Perez 1997). Therefore the transformation process to a great extent depends on the engagement of certain people being particularly good in imaginative exploration and creation (Johnson 1992). Among these social pioneers, intellectually flexible scientists have a very important role to play in such a process of breaking open mental rigidities (Hämäläinen in this volume). The fact is that techno-organizational opportunities do not fall like manna from heaven (Freeman 1987); they have to be created by the scientific community. Early involvement in the development of a new paradigm makes its transformation into a new national trajectory easier and it is likely to strengthen global competitiveness.4 Therefore anticipatory institutional change in the field of science becomes a very important part of the transformation process (Galli and Teubal 1997). Universities and public research institutes have to refocus their research activities, to be able to produce the scientific talents that are needed for participation in the globally organized knowledge creation process (Audretsch 2001). Schumpeter in his early writings (1934) saw the will of the entrepreneur as decisive for the creation of a new techno-organizational development path.
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Even if there are many scientific talents in a specific region or country familiar with the new paradigm, the lack of an entrepreneurial culture may become a decisive hindering factor for the development of a related development path (Audretsch 2001). The niche concept (Kemp 2002) stresses the importance of localized learning; it implies that entrepreneurs are searching for opportunities to apply new knowledge within the existing economic structures. Therefore specialized knowledge, developed within the old paradigm, becomes an important input in the transformation process. New techno-organizational trajectories often grow out of existing ones as the process of transforming a new paradigm into a new development path builds on what is available and is shaped by this. The concept of ‘localized learning’ gives the regional level an important role in the transformation process, as is the case with biotechnology, for example. Regions with special knowledge in the field of agriculture turn to green biotechnology while other regions turn to red biotechnology due to their specific pharmaceutical knowledge. Entrepreneurs’ preparedness to engage in transformational innovation processes depends on the existence of a technological but also of a market niche. Market niches are likely to emerge when the inhabitants of a region or country are open to novelties and eager to make use of fundamentally new products such as, for example, mobile phones. This means that a technology-friendly national or regional culture is important for the development of market niches. Summing up, we can argue that the path creation perspective differs from the path dependency perspective in the way in which economic actors are perceived. Rather then treating them as passive observers within a stream of events – as the concept of path dependency does – they are seen as knowledgeable agents with a capacity to reflect and act in ways other than those prescribed by the existing social rules and taken-for-granted technological artefacts. Path creation is seen as a process of a mindful deviation; it implies an ‘ability to disembed from existing structures defining relevance and also an ability to mobilize a collective despite resistance and inertia that path creation efforts are likely to encounter’ (Garud and Karnoe 2000, p. 235). The authors mention de-framing and unlearning, mobilizing minds, spanning knowledge boundaries, generating momentum, the chunking of objects, enlisting core people, mobilizing time, evoking images of the future, and applying a strategy of ‘bricolage’ as strategic processes in the creation of a new development path. 1.4.1
From Individual Champions to Innovation Networks
However, the so-called ‘big man theory’ (Schienstock 1975), which links techno-organizational development with specific characteristics of exceptional entrepreneurial personalities, hardly reflects the real world; instead, due to
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increasing specialization, new technological trajectories develop within innovation networks (Freeman 1991; Hämäläinen and Schienstock 2001). The increasing complexity of technological development, which combines specialized knowledge from different scientific and technological fields, makes it impossible for individual entrepreneurs or single high-tech small firms to become the only driving force in the process of creating a new development path. Instead the process of transforming a new paradigm into a national trajectory must become an inter-organizational enterprise in which different actors are involved. Linkages and cooperation are important for the development of a new trajectory. These linkages have to include intensive knowledge flows between entrepreneurial firms, between the scientists involved and these firms, between firms and universities, and between high-tech small firms and large established firms. But particularly knowledge-intensive business services (KIBS) have an important role to play in the process of knowledge diffusion, as they can take up a bridging function between the different actors involved in the transformation process and make knowledge flows more effective (Strambach 2001). They can function as some kind of ‘gatekeeper’ by reducing the possible mismatch in language and cognitive orientation amongst collaborators (Palmberg in this volume). However, efficient flows of information and knowledge mediated by KIBS firms are often not enough to substantially improve the exchange of information and knowledge. Due to the fact that faceto-face interaction is still an important part of knowledge communications (Leiponen in this volume), scientists and workers need to be prepared to move among several organizations. For the development of a new trajectory, both regional as well as global networks are important. Often university-based scientists have an important boundary-spanning role in innovation networks as they connect universities with regional or national industry. The fact that the knowledge demanded for creating a new trajectory is seldom available in one space only but is actually globally dispersed, also gives university-based scientists a boundary-spanning role on the global level, connecting regional innovation networks with other innovation networks all over the world. Of course, researchers working in large, globally acting companies can to some extent also assume the same role. These social pioneers can transform regional or national economies from spaces of knowledge-creating places into spaces of knowledge flows in order to accelerate the transformation process (Castells 2000). Pioneering entrepreneurs and innovative networks can take up the function of a trailblazer in the transformation process; however, a full transformation of the whole economy has to include the vast majority of companies of a national or regional industry and of other economic actors (Galli and Teubal 1997). The knowledge, information and experiences of those leading companies in the
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frontline of techno-organizational development and of the support organizations they are cooperating with need to be diffused throughout the whole economy. Such a collective learning process demands a process of institutional reembedding; a new institutional infrastructure needs to be developed that can support the creation of a new trajectory5 (Teubal 1998). It is important to reestablish a good match between the new techno-economic potential and the institutions that regulate and facilitate its full deployment through unleashing a multitude of social and institutional innovations. Here we can mention for example the need for new technology transfer institutions. As long as the underlying problems of the old institutional framework are not recognized and admitted by a great number of economic actors, the mismatch between the new techno-organizational paradigm and the stagnant institutional framework will continue to grow (Perez 1997). Without major institutional changes, which have to take place together with companies’ restructuring processes, a ‘homing’ of the majority of companies into the evolving trajectory is not possible; it is very likely that the path creation process will lose momentum and the whole transformation process will fail. 1.4.2
Users as New Social Actors
The systems of innovation approach, while putting particular emphasis on the demand side (Lundvall and Borrás 1997; Metcalfe 1997), does this only in a very restricted way. ‘In general the customer is constructed more as a passively demanding object and as a source of information that has to be explored …’ (Sörensen 2002, p. 70), while the active part is left to the producers. While it is assumed that new technological developments are influenced and controlled by the demand side, the relationship between producers and users is configured in an asymmetric manner. Producers are expected to take demand into account when they develop new technologies, which means that users do not play an active part in the creation of a new techno-organizational trajectory. Producers and users, however, act within different ‘frames of reference’ comprising a set of beliefs, standards of evaluation, and behaviour (Bijker 1987). Both groups often apply very different criteria in judging the opportunities and threats of a new techno-organizational paradigm and its transformation potential. A new technology, for example, which from a technological and economic perspective may have great future potential, may not do justice to the evaluation criteria applied by users, as their frames often consist of multiple meanings, including, for example, aspects of social and ecological sustainability. It is highly unlikely that an existing techno-organizational path can be transformed fundamentally or even replaced by a new one without users or concerned citizens being actively involved, as they are the ones that are confronted with
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and affected by these deep changes in the first place. It is therefore important to give up the traditional asymmetric configuration of the producer/user relationship and to conceive of user groups and concerned citizens as independent social actors within the process of path creation. The concept of ‘social practice’ (Brown and Duguid 1991) gives users a much more active role in the process of change, as it assumes that novelties become innovations only when they start playing a significant role in meaningful social practices (Tuomi 2002). 1.4.3
The Transformation Process as ‘Contested Terrain’
Transformation periods must be seen as periods of trial-and-error experimentation and of confrontation between the forces of change and those of persistence, as it is widely indeterminate in which direction a new national techno-organizational trajectory develops. Evolutionary thinking admits the social shaping of a new development path,6 which also implies that different interests are at stake. Still there is hardly any mention of the fact that fundamental transformation processes are also fraught with many conflicts spurred by widespread uncertainty and instability (Perez 1997). But the transformation process cannot be conceptualized as a rational decision-making process; instead it involves ‘vested interests’ and ‘power games’. If we take this into account, the development of a new national trajectory must be conceived of as a ‘contested terrain’. For example, already the question whether and to what extent the national scientific community should engage in the development of a new knowledge paradigm may create serious problems; one should not underestimate the stability of scientific institutions and the mental inertia of highly specialized scientific communities. Consequently the issue of whether anticipatory institutional change in the field of science should take place or not, may trigger serious conflicts. We can also anticipate a confrontation between the representatives of the old techno-organizational regime and the propagators of the new development perspective associated with the new paradigm, in which not only the growth and competition model is at stake but also the existing division of power. For the representatives of the past unlearning and leaving behind much of the earned experience and accepting change is particularly painful and will cause resistance in various forms (Perez 1997). Additional conflict can result from the fact that a new paradigm can be transformed into different trajectories and that different actors favour different pathways of techno-organizational development. It is not at all sure that the best solution will always win out; in fact technologically and organizationally inferior solutions may emerge from the ‘contested terrain’ in the long run, simply because the actors that favour these inferior solutions have the strongest power position.
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THE EXOGENOUS DIMENSION OF THE INNOVATION SYSTEM
The innovation system as an open system (Lundvall 1992) is part of a comprehensive hierarchy of systems. It itself consists of a number of subsystems and is linked to other subsystems of the economic system which represent the higher-level system. Consequently, when analysing the development of a new path and its institutional embedding, we also have to take into account the external dimension of the innovation system. In a situation of dynamic change we have to look at processes of co-evolution and mutual adaptation between and within the various economic subsystems.7 Besides the innovation subsystem, the economic system consists of the production system, the resource supply system, including the human capabilities-creating system, and the management or regulatory system as other subsystems.8 As a subsystem, the innovation system has a particular focus: the generation of change in the economic system, by acquiring, producing, and diffusing new knowledge (Hauknes 2000).9 It therefore contributes to the creation of economic growth and social welfare only indirectly, by producing and distributing knowledge that is used to modernize and renew the production system, its products, services, and processes.10 Whether a new development path can be established successfully or not, therefore, very much depends upon the effective management of the interface between the innovation system and the production system. Only if the new knowledge accumulated and created is applied and transformed into new products and techno-organizational production structures and leads to significant improvements in productivity and competitiveness, can we speak of a successful transformation. The innovation system, on the other hand, acquires its structures, ways of operating and functionality through the other economic subsystems. Whether new scientific and other knowledge will be produced within the innovation system (and the production system), very much depends on the capacity of the resource supply system to provide various types of new capital, including in particular the creation of new human capital. Without the allocation of new resources, the innovation system will hardly be able to initiate the development of a new national growth path. Also the management or regulatory system has to take part in the transformation process, as incentives associated with traditional regulations may channel resources in the wrong direction and become a hindrance to the development of new knowledge. On the other hand, eliminating regulations that restrict cooperation can open up new channels for knowledge creation and dissemination (Määttä in this volume). So far research on systems of innovation has rarely considered negative feedback from the creation of a new development path (Hage 1999; Lundvall
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and Archibugi 2001). However, we cannot treat innovation and particularly fundamental techno-organizational changes automatically as a positive-sum game (Boden and Miles 2000). There are always opportunities and risks, winners and losers in a fundamental transformation process. We have to look for example at problems and strains in other social systems and economic subsystems caused by the increasing innovation dynamic. Unintended consequences of a growing innovation dynamic are important to identify, as they may actually question the advantages and gains derived from the establishment of a new development path. A new innovation dynamic released through a changeover to a new national trajectory may create new jobs in emerging new industries, but a ‘skill-biased technical change’ (Bresnahan et al. 1999) may also increase the risk of social exclusion for other groups of employees (Schienstock 2001). And Freeman (1992) has pointed out that together with a new techno-organizational paradigm and its transformation into a national trajectory, new ecological challenges may occur, destroying the prospects for high economic growth. The question of sustainability in economic, social and ecological terms has to come to the forefront in the scientific and political debate on national innovation systems.
1.6
INNOVATION POLICY IN THE TRANSFORMATION PROCESS
1.6.1
The New Role of the State
Often the state is given a decisive role in the process of creating a new technoorganizational path. Stable and lasting processes of path creation can only emerge, as we have argued above, if all actors of an economy are becoming involved and are marching in the same direction. In this respect the state has an important role to play, as companies may not be able to develop the generative impulse that is required to set a path creation process in motion. In a situation of great uncertainty companies often hesitate to undergo major changes, trying to avoid a wrong move (Sabel 1995). However, the old policy recipes do not work any longer, the transformation process not only puts the economy but also the political system under enormous pressure for change. We therefore have to conceptualize the role of the state in the process of technoorganizational development in a new way (see also Hämäläinen in this volume). Traditional direct technology policy saw the state as a sovereign economic actor exercising control over the dynamics of technological progress either through the setting of new research incentives or by establishing publicly owned research institutes, which allowed direct intervention in the process of techno-
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logical development (Schienstock 1994). However, in a period of fundamental change, uncertainty becomes a key issue for policy-makers, as for all other participants. ‘There can be no presumption’, as Metcalfe argues, ‘that the policy maker has a superior understanding of market circumstances or technological information; rather what he does enjoy is superior co-ordination ability across a diverse range of institutions’ (1997, p. 274). A new policy perspective sees the state as a partner in the adventure of exploring a new development path. This does not necessarily mean that the state loses its influence in steering the process of techno-organizational development. In a situation of fundamental transformation, where companies due to great uncertainty about future developments have difficulties in acting strategically, the state has to take the leading role in helping companies to get out of path dependency due to its superior co-ordination ability. This means that while the significance of technological macro-economic management may decrease, the role of the state in the process of path formation remains strong (Hirst and Thompson 1992). The new role of the state can be described as a catalyst for innovation processes, a supporter of ongoing research and innovation activities, a facilitator of cooperation in research and innovation processes, a moderator of diverging interests, an organizer of a dialogue between various economic actors on future developments and as an initiator of questions and new tasks (Schienstock 1994). From what we have said so far, we can conclude that the creation of a new national trajectory needs new forms of co-ordinating various innovation activities; the state no longer controls the innovation process directly through establishing public research institutes and launching large research projects but rather turns to more indirect forms of control (Schienstock 1994). Here we suggest ‘vision creation’ and ‘discursive co-ordination’ as key elements of a new form of steering the transformation process. A systemic vision (Chang and Rowthorn 1995; Schienstock 1999) can be characterized as a set of general ideas of how to transform an economy in order to create economic growth, how to modernize economic structures effectively, and how to restructure production processes in order to increase productivity and innovativeness. It also has a normative dimension, as it becomes the basis of practical restructuring processes. A major advantage of a systemic vision is that it makes communication among social actors possible, even if they have different interests and perceptions. The second aspect of successful co-ordination and transformation management is social discourse among the various interdependent actors of the system. When discursive co-ordination is applied, economic activities are co-ordinated through continuous and rich communication and mutual adjustment. Systemic discourse can be viewed as a platform for jointly creating and exchanging knowledge among different actors. Discursive co-ordination is
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not primarily intended to create consensus among the participants; rather it aims to initiate interactive learning processes. Vision creation and discursive coordination can be seen as forming the framework for connecting existing knowledge stocks and skills, for creating learning opportunities through the exchange of experience, and for opening up new communication channels between the actors in the innovation system (Strambach 2002). 1.6.2
Policy Networks and Policy Learning
The changing role of the state in the process of techno-organizational development reflects the increasing fragmentation of power (Mayntz 1996). This results, on the one hand, from the fact that a growing number of organizations have knowledge relevant for the formulation of innovation policy. The increasing fragmentation of power is, on the other hand, linked to the fact that some organizations have the means to block the implementation of new policy programmes aimed at supporting transformation processes. The state therefore becomes more and more dependent upon other collective actors such as large companies, research institutes, unions and employer associations and is forced to let these organizations participate in the process of policy conceptualization and to integrate them into the process of policy implementation. Because of the growing integration of private and public actors in the process of policy formulation and implementation, policy networks become a new form of governance in the field of technology and innovation policy. They successively replace top-down policy-making in the form of state intervention, as well as more businesslike market-oriented governance (Kickert and Koppenjan 1999; Mayntz 1996, p. 471 ff). Kickert, Klijn and Koppenjan define policy networks as ‘(more or less) stable patterns of social relationships between interdependent actors, which take shape around policy problems and/or policy programs’ (1999, p. 6). The implementation of policy networks gives the state the opportunity to get directly into contact with the relevant actors and to negotiate policy programmes. This means that policy programmes not only profit from a broader knowledge base but also their legitimacy is growing and the probability of successful implementation is increasing due to the binding character of participation. Social actors, having participated in the process of policy formulation, can hardly oppose its implementation, even if the outcome does not support their interests. The emergence of policy networks, we can conclude, cannot only be explained by a weak state. It also demonstrates that the state has become more sensitive to the increasing demand for different expertise in innovation policy, for a growing complexity of political power and the increasing need for joint problem-solving in a path-creating period (Mayntz 1996, p. 474).
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The network-based form of governance is also more and more applied with respect to the internal organization of the policy process. In a situation of fundamental techno-organizational change, innovation policy becomes so complex that a multitude of different and specialized units have to be involved; government agents no longer form a single integrated hierarchy. Particularly when innovation policy takes into account possible negative feedback from the creation of a new national trajectory, steering the policy process through bureaucratic measures of control is no longer an option; instead the increasing complexity can only be coped with by developing intra-organizational networks. Direct communication and knowledge exchange are supported by the growing use of modern ICT within governance processes. Policy formulation within policy networks cannot be understood as strictly rational management of technological change consisting of clearly separated stages: setting goals, developing programmes, and implementing projects (Klijn 1999). Instead we have to conceive of the policy process as a trial-and-error process; there is a strong case for policy experimentation. It is important to guarantee feedback from those experiments to allow for policy-makers and other participants in policy networks to accumulate experiences. Based on the above argumentation, we can characterize innovation policy as a process of policy learning (Lundvall and Johnson 1993, p. 18). ‘The learning approach’, as Lundvall and Borrás argue, ‘... provides a fluid perspective of a policy process in continuous transformation and evolution where no clear stages can be discerned’ (1997, p. 64). Policy learning must be understood as a self-reflexive process. This means more than anticipating new developments and considering them in the development of new strategies; self-reflexivity includes the monitoring of the environment, critically dissociating oneself from the traditional functioning of reality and developing alternative ways of acting (Sabel 1997; Storper 1997). It is, for example, important to reflect on how much deviation from the existing national development path is possible, as major transformation processes, as mentioned before, also cause negative feedback that can undermine all the benefits deriving from the change process. Innovation policy based on reflexive learning can be supported by a set of instruments that allow for continuous self-observation and monitoring the external environment: benchmarking, technology assessment and technology foresight.11 In particular institutional benchmarking has become increasingly popular; governments begin to realize the advantage of institutional adaptation and learning. Freeman has expressed the idea that by comparing various innovation systems and their institutional structures, we might be able to identify ‘good practices’ and ‘new tools’, which could then be ‘borrowed’ by other nations to improve their innovative and economic performance (1987). However, one should not overestimate the chances of being able to identify
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institutional solutions that can easily be transferred from one country to another on the basis of benchmarking activities. This is particularly the case as the institutional setting in most countries becomes increasingly fragile and companies are under pressure to adapt to the new techno-organizational paradigm. In a process of dynamic change it becomes difficult to identify ‘best practices’ or even ‘good practices’ (Porter 1990). Reflexive benchmarking, or intelligent benchmarking as it is also called (Schienstock and Hämäläinen 2001; see also Lundvall and Tomlinson 2001), is less about deciding ‘what is best’ or ‘what universal truth’ can be derived from comparison. The identification of a ‘best practice’ is not the primary goal of reflexive benchmarking; instead it has to do with getting to know more about various institutional solutions in different economic structures. Particularly in a situation of fundamental transformation processes, mechanistic benchmarking is hardly possible, as institutions are becoming increasingly fragile. The aim of reflexive benchmarking is to be able to gain a better understanding of one’s own solutions, their strengths and weaknesses, when seen in light of what others do, and what options they see (Toulmin 1990). Such an understanding can cause policy-makers to assess institutional solutions of their own system much more critically and may help them to deliberately imagine and act on different strategies.
1.7
OVERVIEW OF THE BOOK
We have clustered the chapters of the book into four main parts. In Part One, the conceptual framework that underlies the book is presented. In addition to this introductory chapter by Schienstock, Hämäläinen extends the conceptual framework, presenting particular evidence on a change of national cognitive frames as a precondition for a fundamental transformation of the economy and society. He argues that in an era of fundamental transformation, traditional cognitive frames may become a hindrance to adapting to the new techno-organizational paradigm and pioneering scientists and politicians are needed to come out of the cognitive lock-in. Using Finland as an example, he demonstrates the changeover process from a path dependency perspective to a path creation perspective. Part Two focuses on the industrial and company levels of the transformation process. Paija and Rouvinen focus on the Finnish ICT cluster that has emerged together with Nokia’s development into a global player. Due to its particular strength in telecommunications, Finland has become the most specialized country in the world. The two authors mention strong competition, the unique character of the Finnish telephony market from its opening in 1880, as a key factor that can explain the strength of the ICT cluster to some extent.
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Global orientation and networking are seen as important factors that have sustained the competitiveness of the Finnish telecommunications sector. Despite the radical transformation of the industrial structure due to the development of the ICT cluster, Finland still relies to a significant extent on the more traditional industries such as forestry- and metals-based industries. Based on rich empirical material from case studies, Palmberg concludes that there are significant niches of technological opportunities for the traditional Finnish industries, despite the fact that there is a lower pay-off from R&D investments. To strengthen traditional industries in Finland, Palmberg suggests accelerating the diffusion of new technologies, supporting trans-industry network formation, and improving general framework conditions as key policy measures. Knowledge-intensive business services have become one of the key vectors of knowledge transfer in the innovation system and they are expected to serve as new engines of knowledge-based growth and innovation. Leiponen discusses, based on new data, the development of the KIBS sector in Finland. Although due to its strength in telecommunications, Finland has excellent preconditions for developing a strong KIBS sector, high expectations have not materialized so far. The KIBS sector may be seen as the weak part of the Finnish innovation system. Ali-Yrkkö and Hermans analyse the success story of Nokia, a leading player in the global telecommunications market and Finland’s most famous company. They argue that while the public sector played a significant part in the development of Nokia by funding R&D projects, it profited even more due to a high pay-back ratio to this R&D funding. Furthermore, extensive knowledge exchange takes place within Nokia’s innovation network, which helps all partners to grow very rapidly. Mutual recruitment and exchange of personnel are important channels for distributing knowledge within the network. The authors also mention some problems in the cooperation, such as the allocation of intellectual property rights. Alasoini’s chapter examines the introduction and dissemination of the flexible production model in Finland representing the new organization logic, from a company perspective as well as from the perspective of the national innovation system. The author demonstrates that with respect to production management, work organization and employment relations, Finnish companies have progressed significantly towards a new flexible production model. But he also points to some factors which pose a threat to continuing success: uneven growth in high-tech and traditional sectors, the small number of dynamic mediumsized companies that can take up the role of a system supplier and still unstable cooperation patterns. Part Three focuses on the regional and institutional levels of the transformation process. The success in constructing a flourishing information and telecommunications cluster has encouraged Finland to seek equal possibilities
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in other knowledge-intensive industries. Presently, biotechnology is seen as an auspicious business area. Development in biotechnology is strongly regionally based in Finland, as it is in other countries. During recent years, Turku developed a regional innovation network in this field, as Bruun demonstrates in his chapter. The author sees great growth potential for biotechnology in the city of Turku, due to a strong institutional setting in R&D and increasing interaction among the key network partners. Little production and very little international foreign investment are mentioned as major disadvantages. Tampere Region, as Kautonen, Koski and Schienstock argue, can be seen as a good example of how territories can manage to get out of path dependency and create a new development path. While up until the beginning of the 1990s, smokestack industries dominated in the region, the rapidly developing ICT sector has recently become the driving force of economic growth. The authors argue that in particular the strong cooperation between industry and universities has contributed to the recovery and reinvention of the region. During recent years university reform to increase efficiency can be seen as one of the most important changes in the institutional setting. The renewal of the science system has, as Nieminen and Kaukonen argue, led to a more applied orientation particularly in universities of technology and has stimulated increasing cooperation among universities, research institutes and industry. Although not only industry but also universities have benefited significantly from research cooperation, to what extent universities should focus on applied research is still an open question. The establishment of polytechnics, as Kekkonen argues, can be seen as the biggest reform in the Finnish vocational education system. On the one hand, the polytechnic reform reflects a growing trend towards higher education; on the other hand, it can be seen as a reaction to an increasing need for students that have a strong applied orientation. A side effect is, however, the decreasing attractiveness of secondary vocational education. This may cause some structural problems in future as in many low-tech industries a labour force educated at upper secondary vocational level contributes significantly to value added. In the course of development towards a knowledge-based economy, the labour market is also undergoing significant changes. The traditional idea of lifelong, highly standardized employment, as Suikkanen and Linnakangas demonstrate, has increasingly been challenged as more and more Finns have to accept unstable working careers. However, while the growing dynamic of the labour market is mostly associated with employment risks, it can also be seen as creating new opportunities to strive for more qualified jobs. On the other hand, the still high unemployment rate and particularly the growing share of long-term unemployed can be seen as a major challenge for the Finnish labour market policy.
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Legal regulations and particularly competition law represent an important part of the economy’s management system, which closely interacts with the innovation system. Määttä suggests that the fact that innovation competition has become more common, particularly with respect to high-tech industries, needs to be reflected in competition law. One of his main arguments is that, if technological development is rapid, horizontal and partly vertical collusion by enterprises is not a great threat, as this will keep competition alive. Therefore the author concludes that competition law should focus more on dynamic than on static efficiency also in Finland. Although Finnish economic success during the 1990s is often associated with companies’ specialization strategies, the science and technology policy of the Finnish government, as Lemola argues, also had a significant influence on the fact that the country came rather strongly out of the deep depression at the beginning of the last decade. In general, Finnish science and technology policy was based on a strategy of copying and adapting successful models from elsewhere. This strategy has helped Finland in its catching-up process and has placed it among the leading industrial countries. Successful further development, on the other hand, becomes a great challenge to future policy-making, as imitation is no longer an option for Finnish science and technology policy. Lemola argues that the policy in this field should be built more on exploitation. In the last chapter, in Part Four, Schienstock tries to fill the conceptual framework developed at the beginning of the book based on the material presented in the various chapters. Not least due to the systemic approach, Finland was able to successfully develop a new national trajectory and to become one of the leading countries in the new knowledge paradigm. However, Schienstock also points to major shortcomings that suggest being less enthusiastic when the Finnish knowledge-based society model is discussed. The case of Finland, as Schienstock argues, at the same time demonstrates that scenarios anticipating the end of the welfare state are also fairly exaggerated, although cutbacks have taken place.
1.8
CONCLUSION
The aim of this introductory chapter is to reorient research based on the systems of innovation approach, which has concentrated so far on the aspect of path dependency. While the strength of this perspective is that it does not separate technological innovation from past developments, but assumes some kind of continuity in the process of technological change, it assigns too much weight to history, and therefore inadequately characterizes the fragility of national techno-organizational trajectories and the embedding institutions. Particularly in a period of an emerging new knowledge paradigm, research needs to focus
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more on unlocking and path creation, as path dependency may lead to serious lock-ins. The process of path creation is a highly complex process; it cannot be explained by referring to single factors or simple models. Economic pressures, major change events and endogenous change processes must be taken into account when studying the process of developing a new national trajectory. Concerning endogenous processes, attention has to be given to both technoorganizational restructuring on the firm level as well as institutional change. Also new forms of policy-making, attempting to indirectly control the innovation process through policy networks, can be seen as part of the systemic transformation currently taking place. The following chapters provide valuable pieces of the mosaic of the Finnish transformation process towards a knowledge economy. In the end we will try to analyse more closely the changeover from path dependency to path creation in the Finnish economy.
NOTES 1. For example, flexi-Fordism can be seen as a specific trajectory of the Fordist organization paradigm developed in Germany due to its specific institutional environment (vocational training system and a strong position of unions in collective bargaining). 2. In the following I will mainly use the concepts of techno-organizational change or a technoorganizational trajectory, as technological and organizational changes in general co-evolve. 3. For the distinction between organizations and institutions, see Edquist and Johnson (1997). 4. There is empirical evidence that ICT or biotechnology-related production has an intensifying concentration tendency and that laggards in the two technologies rarely catch up, let alone leapfrog the leaders (Koski, Rouvinen and Ylä-Anttila 2002 and Audretsch 2001). 5. Here we refer to the innovation system in a narrow sense. For a distinction between the innovation system in a narrow and in a wider sense see Lundvall (1992). 6. This perspective distinguishes economic evolutionary theory from biological concepts (see for example Nelson 1993). 7. Here we face the problem of boundary-drawing. A wider concept of the innovation system, for example, conceives of parts of the other economic subsystems as belonging to the innovation system. 8. We here refer to the AGIL scheme (see Parsons, Bales and Shils 1953). The authors identify four functional requirements that represent the basis for social subsystems in general and for subsystems of the economic system in particular: adaptation, goal attainment, integration and pattern maintenance. We associate the innovation system with the adaptation function, the production system with the goal attainment function, the management system with the integration function, and the resource supply system with the pattern maintenance function. Functional systems represent abstract wholes, which – contrary to structural systems that represent concrete organizations – can only be identified and distinguished from their environment analytically. The identification of different system requirements and therefore also of different subsystems represents a subjective decision made by each author. 9. While the emergence of specialized subsystems was seen as an important phenomenon of modernity, we can now identify a new element of modern societies. Specific functions of an economy are no longer the domain of specialized subsystems only; instead, polycentricity becomes a more common phenomenon. This means that while specialized subsystems are still important, they are increasingly forced to cooperate with other subsystems in carrying out their particular function. For example, the creation of new knowledge takes place not
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only in the innovation system but also in the production system through various types of learning. There is no room here to further develop the methodological aspects of polycentricity. 10. Nelson argues that there are sets of intertwining terms and characterizations that make a focused analytical discussion very difficult (1993, p. 518). Particularly the fact that innovation systems are directly associated with competitiveness, growth, and social welfare is seen by him as a major problem. He claims that it is important to be able to regard innovation apart from the overall competitiveness of national economies. 11. Both instruments, technology assessment and technology foresight, have passed through a functional change. There is considerable promise in deploying foresight as a platform for sharing perceptions and as a tool for learning and networking. The original idea of using foresight as a tool for selecting promising technologies and setting priorities in innovation policy, on the other hand, is difficult to realize, if at all. Similarly, technology assessment, first seen as an early warning system, has developed into a concept of shaping technology through social discourse.
REFERENCES Arthur, B.W. (1996), ‘Increasing Returns and the New World of Business’, Harvard Business Review, July–August, 100–9. Audretsch, D.B. (2001), ‘The Role of Small Firms in U.S. Biotechnology Industry’, Small Business Economics, Special Issue, 1–2 (17), 3–15. Bassanini, Andrea P. and Giovanni Dosi (2000), ‘When and How Chance and Human Can Twist the Arms of Clio’, in Raghu Garud and Peter Karnoe (eds), Path Creation and Path Dependency, Nahwah, NY: Lawrence Erlbaum Publishers, pp. 41–68. Bijker, Wiebe E. (1987), Of Bicycles, Bakalites, and Bulbs: Towards a Theory of Sociotechnical Change, Cambridge, MA.: The MIT Press. Boden, Mark and Ian Miles (2000), ‘Conclusions: Beyond the Services Economy’, in Mark Boden and Ian Miles (eds), Services and the Knowledge-Based Economy, London and New York: Continuum, pp. 247–64. Bresnahan, Timothy F., Erik Brynjolfsson and Lorin M. Hitt (1999), ‘Information Technology, Workplace Organization and the Demand for Skilled Labor: Firm-level Evidence’, Working Paper 7136, National Bureau of Economic Research, NBER Working Paper Series, May. Brousseau, Eric and Alain Rallet (1998), ‘Beyond Technological or Organizational Determinism: A Framework to Understand the Link between Information Technologies and Organizational Changes’, in Stuart Macdonald and Gary Madden (eds), Telecommunication and Socio-economic Development, Amsterdam: North-Holland, pp. 245–62. Brown, J.S. and P. Duguid (1991), ‘Organizational Learning and Communities-ofPractice: Towards a Unified View of Working, Learning and Innovation’, Organization Science 2 (1), 40–57. Castells, Manuel (1997), The Rise of the Network Society, First edition, Oxford: Blackwell Publishers. Castells, Manuel (2000), The Rise of the Network Society, Second edition, Oxford: Blackwell Publishers. Castells, Manuel and Pekka Himanen (2001), The Finnish Model of the Information Society, Sitra Reports Series 17, Vantaa: Tummavuoren Kirjapaino Oy.
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Chang, Ha-Joon and Bob Rowthorn (1995), ‘Role of the State in Economic Change, Entrepreneurship and Conflict Management’, in Ha-Joon Chang and Bob Rowthorn (eds), Role of the State in Economic Change, Oxford: Oxford University Press. David, P. (1985), ‘Clio and the Economics of QWERTY’, Economic History, 2 (75), 227–323. Dosi, Giovanni (1982), ‘Technological Paradigms and Technological Trajectories: A Suggested Interpretation of the Determinants and Directions of Technological Change’, Research Policy, 11 (3), 147–62. Dosi, Giovanni, Keith Pavitt and Luc Soete (1990), The Economics of Technical Change and International Trade, London: Harvester Wheatsheaf. Edquist, Charles and Björn Johnson (1997), ‘Institutions and Organizations in Systems of Innovation’, in Charles Edquist (ed.), Systems of Innovation: Technologies, Institutions and Organizations, London: Pinter Publishers, pp. 41–63. Foray, David (1997), ‘Generation and Distribution of Technological Knowledge: Incentives, Norms, and Institutions’, in Charles Edquist (ed.), Systems of Innovation: Technologies, Institutions and Organizations, London: Pinter Publishers, pp. 64–85. Freeman, Chris (1987), Technology Policy and Economic Performance: Lessons from Japan, London: Pinter Publishers. Freeman, Chris (1991), ‘Networks of Innovators: A Synthesis of Research Issues, Research Policy, 4 (20), 499–514. Freeman, Chris (1992), ‘A Green Techno-Economic Paradigm for the World Economy’, in Chris Freeman (ed.), The Economics of Hope, London: Pinter Publishers, pp. 190–211. Freeman, Chris and Charlotta Perez (1988), ‘Structural Crisis of Adjustment: Business Cycles and Investment Behavior’, in Giovanni Dosi, Chris Freeman, Richard R. Nelson, G. Silverberg and Luc Soete (eds), Technical Change and Economic Theory, London: Pinter Publishers, pp. 38–66. Galli, Riccardo and Morris Teubal (1997), ‘Paradigmatic Shift in National Innovation Systems’, in Charles Edquist (ed.), Systems of Innovation: Technologies, Institutions and Organizations, London: Pinter Publishers, pp. 342–70. Garud, Raghu and Peter Karnoe (2000), ‘Path Creation as a Process of Mindful Deviation’, in Jussi T. Koski and Suvi Marttila (eds), Proceedings: Conference on Knowledge and Innovation, 25–26 May, Helsinki: Helsinki School of Economics and Business Administration, Center for Knowledge and Innovation Research, pp. 234–67. Grabher, Gernot (1993), ‘The Weakness of Strong Ties: The Lock-in of Regional Development in the Ruhr Area, in Gernot Grabher (ed.), The Embedded Firm: On the Socio-economics of Industrial Networks, London: Routledge, pp. 255–77. Hämäläinen, Timo (2003), National Competitiveness and Economic Growth: The Changing Determinants of Economic Performance in the World Economy, Cheltenham: Edward Elgar. Hämäläinen, Timo and Gerd Schienstock (2001), ‘The Comparative Advantage of Networks in Economic Organization: Efficiency and Innovation in Highly Specialized and Uncertain Environments’, in OECD (ed.) Innovative Networks: Cooperation in National Innovation Systems, OECD Proceedings, Paris: OECD, pp. 17–45. Hauknes, Johan (2000), ‘Dynamic Innovation Systems: What is the Role of Services?’, in Mark Boden and Ian Miles (eds), Services and the Knowledge-Based Economy, London and New York: Continuum, pp. 38–63.
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Hirst, P. and G. Thompson (1992), ‘The Problem of Globalization: International Relations, National Economic Management, and the Formation of Trade Blocs’, Economy and Society, 4 (12), 357–96. Johnson, Björn (1992), ‘Institutional Learning’, in Bengt-Åke Lundvall (ed.) National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London: Pinter Publishers, pp. 23–44. Kemp, René (2002), ‘Environmental Protection through Technological Regime Shifts’, in Andrew Jamison and Harald Rohracher (eds), Technology Studies and Sustainable Development, Munich, Vienna: Profil Verlag, pp. 95–126. Kickert, Walter J.M., Erik H. Klijn and Joop F.M. Koppenjan (eds) (1999), Managing Complex Networks. Strategies for the Public Sector, London, Thousand Oaks, CA and New Delhi: Sage. Kickert Walter J.M. and Joop F.M. Koppenjan (1999), ‘Public Management and Network Management: An Overview’, in Walter J.M. Kickert, Erik H. Klijn and Joop F.M. Koppenjan (eds), Managing Complex Networks. Strategies for the Public Sector, London, Thousand Oaks, CA and New Delhi: Sage, pp. 35–61. Klijn, Eric H. (1999), ‘Policy Networks: An Overview’, in Walter J.M. Kickert, Eric H. Klijn and Joop F.M. Koppenjan (eds), Managing Complex Networks: Strategies for the Public Sector, London, Thousand Oaks, CA and New Delhi: Sage, pp. 14–34. Kogut, B. (1991), ‘Country Capabilities and the Permeability of Borders, Strategic Management Journal, Special Issue 1–3 (12), 33–47. Koski, H., P. Rouvinen and P. Ylä-Anttila (2002), ‘ICT Clusters in Europe: The Great Central Banana and Small Nordic Potato’, Information Economics and Policy, 14 (2), 145–65. Lundvall, Bengt-Åke (1992), ‘Introduction’, in Bengt-Åke Lundvall (ed.), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London: Pinter Publishers, pp. 1–22. Lundvall, Bengt-Åke and Daniele Archibugi (2001), ‘Introduction: Europe and the Learning Economy’, in Daniele Archibugi and Bengt-Åke Lundvall (eds), The Globalizing Learning Economy, Oxford, New York: Oxford University Press, pp. 1–20. Lundvall, Bengt-Åke and Susana Borrás (1997), The Globalising Learning Economy: Implications for the Innovation Policy, EUR 18307, Brussels: European Commission/TSER. Lundvall, B.-Å. and B. Johnson (1993), ‘The Learning Economy’, Journal of Industrial Studies, 1 (2), 23–42. Lundvall, Bengt-Åke and Mark Tomlinson (2001), ‘Learning by Comparing: Reflection on the Use and Abuse of Benchmarking’, in G. Sweeney (ed.), Innovation, Economic Progress and Quality of Life, Cheltenham: Edward Elgar, pp. 120–36. Mayntz, Renate (1996), ‘Policy-Netzwerke und die Logik von Verhandlungssysteme’, in Patrik Kenis and Volker Schneider (eds), Organisation und Netzwerk: Institutionelle Steuerung in Wirtschaft und Gesellschaft, Europäisches Zentrum, Vienna, Frankfurt, New York: Campus, pp. 471–96. Metcalfe, Stan (1997), ‘Technology Systems and Technology Policy in an Evolutionary Framework’, in Daniele Archibugi and Jonathan Michie (eds), Technology, Globalisation and Economic Performance, Cambridge: Cambridge University Press, pp. 268–96. Nelson, Richard R. (ed.) (1993), National Systems of Innovation: A Comparative Study, Oxford: Oxford University Press.
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OECD (1988), New Technologies in the 1990s: A Socio-economic Strategy, Paris: OECD. OECD (1992), Technology and the Economy: The Key Relationships, Paris: OECD. OECD (1998), Technology, Productivity and Job Creation: Best Policy Practices, Paris: OECD. Parsons, Talcott, Robert F. Bales and Edward A. Shils (1953), Working Papers in the Theory of Action, Glencoe, IL.: Free Press. Pavitt, Keith (2000), ‘Innovation Routines in the Business Firm: What Matters, What’s Staying the Same, and What’s Changing?’ Paper for a keynote speech at the meeting of the Schumpeter Society in Manchester, 1 July, 2000, SPRU, Science and Technology Policy Research, Brighton. Perez, Charlotta (1997), ‘The Social and Political Challenge of the Present Paradigm Shift’, Paper presented for the Norwegian Investorforum, 15–16 May, Oslo. Porter, Michael (1990), The Competitive Advantage of Nations, New York: Free Press. Sabel, Charles F. (1995), ‘Bootstrapping Reform: Rebuilding Firms, the Welfare State and Unions, Politics and Society, 1 (23), 5–48. Sabel, Charles F. (1997), ‘Constitutional Orders: Trust Building and Response to Change’, in Rogers J. Hollingworth and Robert Boyer (eds), Contemporary Capitalism: The Embeddedness of Institutions, Cambridge: Cambridge University Press, pp. 154–88. Schienstock, Gerd (1975), Organisation innovativer Rollenkomplexe, Meisenheim am Glan: Anton Hain. Schienstock, Gerd (1994), ‘Technology Policy in the Process of Change: Changing Paradigms in Research and Technology Policy’, in Georg Aichholzer and Gerd Schienstock (eds), Technology Policy: Towards an Integration of Social and Ecological Concerns, Berlin and New York: Walter de Gruyter, pp. 1–23. Schienstock, Gerd (1999), ‘Transformation and Learning: A Perspective on National Innovation Systems’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy. The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Hakapaino Oy. Schienstock, Gerd (2001), ‘Social Exclusion in the Learning Economy’, in Daniele Archibugi and Bengt-Åke Lundvall (eds), The Globalizing Learning Economy, Oxford and New York: Oxford University Press, pp. 163–76. Schienstock, Gerd and Timo Hämäläinen (2001), Transformation of the Finnish Innovation System: A Network Approach, Sitra Reports Series 7, Helsinki: Hakapaino Oy. Schumpeter, Joseph A. (1934), The Theory of Economic Development, Cambridge, MA.: Harvard University Press. Sörensen, Knut H. (2002), ‘Providing, Pushing and Policing. Towards a New Architecture of Technology Policy’, in Andrew Jamison and Harald Rohracher (eds), Technology Studies and Sustainable Development, Munich and Vienna: Profil Verlag, pp. 65–94. Storper, Michael (1997), The Regional World: Territorial Development in a Global Economy, New York: The Guilford Press. Strambach, Simone (2001), ‘Die Veränderung von Innovationssystemen in der globalen Ökonomie: wissensintensive unternehmensorientierte Dienstleistungen und organisatorischer Wandel dargestellt an Deutschland und Grossbritanien’, Universität Stuttgart, Institut für Geographie, unpublished manuscript.
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Strambach, Simone (2002), ‘Change in the Innovation Process: New Knowledge Production and Competitive Cities – The Case of Stuttgart’, European Planning Studies, 2 (10), 215–31. Teubal, Morris (1998), Enterprise Restructuring and Embeddedness – An Innovation Systems and Policy Perspective, CRIC Discussion Paper No 15, Manchester: University of Manchester. Toulmin, Stephen E. (1990), Cosmopolis. The Hidden Agenda of Modernity, New York: Free Press. Tuomi, Ilkka (2002), Networks of Innovation. Change of Meaning in the Age of the Internet, Oxford: Oxford University Press.
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2. Towards a theory of social innovation and structural change* Timo Hämäläinen 2.1
INTRODUCTION
The world economy is currently undergoing a major techno-economic transformation that is comparable to the first and second industrial revolutions. The rapid advance and diffusion of information and communication technologies (ICTs), the increasing global specialization of value-adding systems, new cooperative and skill-intensive forms of organization as well as the growing differentiation of demand patterns have challenged the old economic and social structures of industrialized countries. In this rapidly changing environment, the performance of socio-economic systems at different levels of analysis – organizational sub-units (departments, divisions), organizations (private, public, third sector), organizational fields, sectors and clusters, geographical subregions, national economies and supranational governance structures (EU, NAFTA, etc.) – depends on their capacity to renew their socio-institutional structures. A rapidly and coherently changing system can develop complementarities and synergies among its core elements and those of the environment. The dynamic match between the system and its environment can produce learning, scale and external economies that lead to an ‘increasing returns’ regime characterized by rapid productivity growth and sustainable competitive advantage (Arthur 1994; Kogut and Parkinson 1993; Lipsey 1997). On the other hand, slow, partial or incoherent structural adjustment may lock the system into a ‘decreasing returns’ regime of slow productivity growth and eroding competitiveness.1 The importance of structural adjustment capacity for economic performance underlines the need to understand the nature of socio-institutional change processes. Unfortunately, such systemic change processes have not been the focus of any branch of social sciences in recent decades. The rather stable postwar years favoured scientific specialization and static theoretical frameworks. For example, mainstream economics became increasingly mathematical and took for granted the gradually evolving institutional framework 28
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within which economic activities take place (Heilbroner and Milberg 1997). At the same time, political scientists focused their attention on political behaviour within established institutional structures. Their research involved voting behaviour, party formation and public opinion (Scott 2001, p. 7). Even the ‘new institutionalism’ in organizational research developed a rather static approach by analysing how institutions initially emerge and diffuse and then shape organizational behaviour in particular fields (Powell and DiMaggio 1991). Until recently, this research paid little attention to ‘de-institutionalization’ and ‘re-institutionalization’ processes, that is, the replacement of established institutions by new ones (Scott 2001, p. 181). As Seo and Creed conclude, ‘during the past two decades, institutional theorists have been able to offer more insights into the processes that explain institutional stability than those that explain institutional change’ (Seo and Creed 2002, p. 222). The first part of this chapter sketches a theory of social innovation that lays out the main phases, drivers and constraints of structural change processes. We define social innovations as changes in social structures that lead to improvements in a system’s economic and social performance. The social structures include: (a) the policy regime (the system’s public goods and services); (b) the regulatory framework (codified behavioural rules such as laws, regulations, collective agreements, industry standards, and so forth); and (c) organizational principles and arrangements. The second part of the chapter elaborates the theory with an interesting case of structural adjustment in Finland during the 1980s and 1990s. After an economic growth miracle comparable to those of Japan and Germany during the postwar decades, Finland plunged into a severe depression in the early 1990s. The crisis led to a major structural transformation of Finnish industries and the public sector that catapulted Finland to the top of the world competitiveness rankings in the mid-1990s, where it has stayed ever since. The Finland case emphasizes the importance of changes in collective frames, values, norms and theories for structural adjustment capacity. Structural change is preceded and to a large extent determined by change in collective mental structures. Although we elaborate our theory at the level of a nation, our aim is to develop a more general theory of social innovation and structural change. Similar mental and structural change processes take place in socio-economic systems of very different scope and function: organizational departments and divisions, firms and government agencies, industrial sectors and clusters, regions and nations, and even supranational organizations. The common denominator of these systems is a group of human beings faced with a changing environment. The different fields of socio-institutional change offer a rich arena for future research and the elaboration of our theory.
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TOWARDS A THEORY OF SOCIAL INNOVATION
During periods of evolutionary environmental change, the technological, economic and institutional structures of socio-economic systems tend to form a rather stable and coherent system (Figure 2.1). The various elements of the system develop incrementally without creating major tensions or adjustment problems. The behaviour of individuals and organizations is highly routinized along historical patterns. Feedback information
Attention & rigidities
Cognitive frames Values & norms
Performance
Behavioural patterns (practice)
Strategies & organizational arrangements
Policy regime & regulatory framework
Theoretical & ideological paradigms
Changing natural, technological & economic environment Figure 2.1
Social innovation process
The established behavioural patterns can be highly successful in a stable context. The good performance of the system provides positive feedback information that strengthens the shared cognitive frames, values (moral, ethical, aesthetic) and behavioural norms. These, in turn, support the generally accepted theoretical and ideological paradigms. This collective ‘mental paradigm’ shapes the formal political and regulatory structures of the society. The policy regime and regulatory framework tend to form a coherent extension and elaboration of the mental paradigm during evolutionary periods of socio-economic development. They include the principal duties of the government (public goods and services) and the codified behavioural rules of the system (such as laws and regulations, collective agreements, standards). Organizational strategies are formulated in a changing natural, technological, economic and institutional environment. When environmental change is slow, the organizational strategies and arrangements tend to form a good match with the established mental, political and regulatory frameworks. The day-today behaviour (practice) of individuals takes place within these established mental, political, regulatory and organizational structures. Once established, diffused and shared, these behavioural patterns form distinct styles or routines
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in different spheres of life (lifestyles, artistic styles, organizational routines, and so forth). Since individuals usually belong to multiple communities with varying mental paradigms and institutional structures, the dominating behavioural constraints and incentives are determined by the activity in question and the social context within which it is conducted.2 Major changes in the natural, technological, economic and social environment of human and organizational behaviour challenge the established structures of the society.3 The old behavioural patterns and mental paradigms begin to cause increasing problems in a rapidly changing environment. Moreover, new technologies and organizational innovations may not reach their full potential in the established political and regulatory framework. Increasing tensions emerge among the different parts of the socio-economic system. As a result, the performance of organizations begins to decline and the whole system experiences poor economic performance (decreasing returns). The signs of declining performance may go unnoticed for a while, as people are used to good performance and do not expect negative feedback. Moreover, changing one’s cognitive frame, values and norms is not easy. Being the basis of one’s personal security, changing them creates psychological distress and uncertainty. As a result, the first signs of performance problems are often swept under the rug with ad hoc explanations. The declining performance of established practices creates widespread uncertainty and collective cognitive dissonance among individuals who, locked into their established mental paradigm, tend to have problems identifying and understanding the true source of the problems. Their established cognitive frames focus attention on traditional variables and explanations that may no longer be relevant in the changed environment. These mental rigidities may be increased by the one-sided information of special interest groups who stand to lose from structural change (Olson 1982). They attempt to strengthen the old mental paradigms that underpin the established institutional structures that benefit them. Individuals may pursue several strategies to reduce the cognitive dissonance and insecurity caused by negative feedback information (see Festinger 1957). They may attempt to avoid information, experiences, social situations and environments that could increase their cognitive dissonance and seek others that would be consonant with their established mental frameworks. Since natural, technological and economic environments are rather difficult to change, the dissonance-reduction strategies of individuals tend to focus on their own mental structures and the social environment. Thus, they may change a problematic element of their own cognitive frame, decrease another element’s importance, or add a new consonant element to their established frame. Individuals may also be able to change their cognition about the socio-economic environment by actively seeking the support of social groups who share their views. In the
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extreme, strong social support may even allow the ‘denial of reality’, in other words the ignoring of clear evidence. Individuals may also reduce their insecurity by clinging to traditional ideologies and values (such as nationalism, family, religion), devoting themselves to specialized cults and movements with strong values and behavioural rules (environmental activists, extreme political parties, motorcycle gangs, and so on), or by calling for strong leaders who promise to restore stability (‘law and order’) in the society (Hitler, Mussolini, and others). All of these strategies provide simple solutions to complex personal and social problems, and reduce the personal uncertainty and insecurity related to them. Due to these uncertainty-reducing strategies, there seems to be a threshold of poor performance below which individuals and organizations will not change their mental structures and behavioural patterns (Schienstock and Hämäläinen 2001). A major crisis is often needed before individuals are ready to discard their old mental structures and adopt new ones. Since structural change is usually preceded by mental change, major structural transformations are often preceded by economic or other crises. The structural problems are often first recognized by the new or young members of the system who have not yet been fully socialized into the established mental paradigm. The poor performance of the established structures makes the serious consideration of alternative structures increasingly legitimate (Oliver 1992; Scott 2001). The old members have well established mental frameworks that guide their behaviour and attention to activities that tend to further strengthen these frameworks. The longer the positive experience they have of the old behavioural patterns and structures, the harder it is for them to change their mental frameworks and behavioural patterns. This creates a growing mental gulf between the old and young members of the socio-economic system during periods of rapid environmental change. The varying pace at which people recognize and deal with their cognitive dissonance creates tensions within the system. The pioneers of the ‘new age’ may adopt new cognitive frames, values and norms and become dissatisfied with the old political, regulatory and organizational structures. The conservatives at the other end of the spectrum may suffer from increasing mental distress but cling to their established mental paradigm and resist structural change. Many others undergo the psychologically difficult process of readjusting their old mental frameworks to better match the changing environment. Since the frames, values and norms of different groups of people are at least partially incommensurable, they have problems understanding others’ points of view and often end up in conflicts. The heterogeneity of mental frameworks is further increased by the growing specialization of socio-economic activities, as well as the integration of previously separate systems (Parsons 1966).
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Once they gain wide support, the new collective frames, values and norms tend to be codified into new behavioural principles, ideologies and theories that will guide individual and collective behaviour. The prevailing mental paradigm of the system shapes the political decisionmaking process that determines the collective goods and services provided and the behavioural rules implemented. Together these mental, political and institutional structures form the social constraints and behavioural incentives for individuals and organizations in different fields. Historical analyses of structural change processes in different socio-economic systems tend to find rational explanations for each step in the change process. These explanations run directly from the emergence of a particular structural problem (reflected in poor performance) to the new institutional arrangement that solves it (see Figure 2.1). The intervening process of collective learning and reframing through which the shared mental paradigm (frames, values, norms, ideologies and theories) is changed is neglected. In the following case study we argue that the rapid structural upgrading in Finland in the early and mid1990s was triggered by the severe economic crisis at the beginning of the decade. However, the structural transformation of the 1990s would not have been possible without the prior emergence and diffusion of a new mental paradigm in Finland during the 1980s. This new paradigm provided a worldview, values, norms, an ideology and economic theories that challenged those of the established post-war paradigm. Once the economic crisis had seriously discredited the old paradigm, the competing one was adopted as a basis for new policies, institutions and organizational arrangements. The next section describes the structural change process in Finnish society, while the subsequent section analyses the mental paradigm shift that made the structural changes possible.
2.3
STRUCTURAL ADJUSTMENT AND INCREASING COMPETITIVENESS IN FINLAND
The post-war growth experience of Finland resembles the contemporary growth miracles of Japan and West Germany. After the lost war and heavy war reparations, the Finnish economy industrialized very rapidly on the back of heavy investments in export-oriented basic industries such as paper and pulp, basic metals and chemicals. There was a national consensus on the investment-driven growth strategy that rapidly brought Finland closer to the world technological frontier and created new technological capabilities among Finnish firms (Pohjola 1996). The acquisition of foreign machinery and equipment played a key role in the technological catching up process. Equally important was the
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determination with which the national education system was developed. The growth strategy was also supported by: tightly regulated capital markets (low interest rates); generous tax exemptions for investments; flexible exchange rate policies; and the highly profitable barter trade with the Soviet Union. The Finnish welfare state was modelled according to the successful Swedish example. At the end of the 1980s, Finland had reached the league of the wealthiest countries in the world as measured by GDP per capita. Her catching up process was perhaps even more impressive than those of West Germany and Japan, because Finland was not an industrialized economy before the war like these two other countries. However, at the same time, the structural inefficiencies and distortions created by the investment-driven growth strategy also began to emerge. The deregulation of financial markets (increasing real interest rates) and the collapse of the Soviet Union revealed the structural inefficiency of the Finnish economy in the new techno-economic environment. The fact that Finland was the most expensive OECD country both in 1989 and 1990 in Purchasing Power Parity comparisons reflected this inefficiency. Table 2.1 shows how the overall structural competitiveness of Finland deteriorated from 9th place to 14th place among the OECD countries between the early 1980s and early 1990s. The overall competitiveness index is an average of seven competitiveness factors in the new economic paradigm, shown below. These factors were synthesized from the vast competitiveness and growth literature in economics, strategy, management and innovation (see Schienstock and Hämäläinen 2001). 1. New productive resources (venture capital, human capital, scientific knowledge, ICT infrastructure); 2. New technologies (R&D inputs, innovations, adoption of ICTs); 3. New organizational arrangements (allocative, technical, co-ordination and dynamic efficiencies); 4. New product market characteristics (sophistication of demand, product market institutions, user-producer co-operation); 5. Degree of economic internationalization (foreign direct investment, international trade, cross-border alliances); 6. Institutional incentives (taxation, regulation, returns to education); 7. Role of government (expenditure on efficiency and competitiveness versus equity-related tasks). The numerical values for each competitiveness factor were calculated as a weighted average of several normalized indicators (hence their range from –1 to +1). The normalization made possible the comparison and combination of indicators with very different measurement scales.
Structural competitiveness of nations in the new techno-economic paradigm
Competitiveness Rank
Schienstock and Hämäläinen (2001)
USA Switzerland Japan Germany Great Britain Sweden Canada Netherlands Belgium Australia France Finland Denmark Austria New Zealand Norway Ireland Portugal Italy Spain Greece Turkey
1.27 1.19 0.7 0.65 0.62 0.6 0.52 0.52 0.14 0.08 0.01 –0.02 –0.06 –0.12 –0.17 –0.24 –0.3 –0.79 –0.8 –1.0 –1.18 –1.6
Early 1990s Japan USA Sweden Netherlands Canada Switzerland Denmark Germany Great Britain New Zealand Belgium Australia Norway Finland Austria France Ireland Portugal Turkey Greece Spain Italy
0.82 0.69 0.47 0.45 0.42 0.38 0.34 0.29 0.27 0.2 0.16 –0.04 –0.05 –0.08 –0.12 –0.13 –0.18 –0.63 –0.63 –0.66 –0.9 –1.1
Mid-1990s Sweden Finland USA Canada Switzerland Great Britain Japan Norway Denmark Netherlands Australia New Zealand Germany France Belgium Ireland Austria Portugal Spain Italy Greece Turkey
0.85 0.71 0.62 0.59 0.56 0.5 0.44 0.41 0.34 0.32 0.22 0.21 0.1 0.01 –0.02 –0.04 –0.09 –0.75 –0.83 –1.06 –1.47 –1.62
Late 1990s USA Finland Switzerland Canada Netherlands Denmark Australia Sweden Ireland Norway Japan Great Britain Belgium Germany New Zealand Austria France Portugal Spain Turkey Italy Greece
1.1 0.88 0.72 0.55 0.55 0.42 0.41 0.36 0.28 0.24 0.23 0.22 0.11 0.06 –0.09 –0.28 –0.38 –0.46 –0.62 –1.33 –1.34 –1.64
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Canada 0.62 Switzerland 0.46 Australia 0.43 USA 0.42 Sweden 0.41 Japan 0.23 Germany 0.2 Netherlands 0.18 Finland 0.15 Great Britain 0.11 New Zealand 0.1 France 0.01 Norway 0.01 Austria –0.01 Denmark –0.02 Belgium –0.06 Greece –0.27 Ireland –0.27 Spain –0.38 Portugal –0.62 Italy –0.63 Turkey –1.05
Late 1980s
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Early 1980s
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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Table 2.1
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In the autumn of 1990, the Finnish economy collapsed into the most severe depression in independent Finland’s history. Numerous firms filed for bankruptcy, thousands of over-borrowed households defaulted on their debts and the banking system went into deep crisis. The unemployment rate peaked at 20 per cent and the state ran a massive budget deficit. Very soon, the state finances were at the mercy of international lenders. The crisis was too deep to be swept under the rug; ad hoc explanations would no longer restore people’s trust in the old institutions and ways of doing things. It became clear the Finnish economy and society required major structural changes. In the early 1990s, Finnish firms laid off their workers en masse, reorganized their business processes, and considerably improved their productivity and competitiveness. And all this took place almost without new investments. The government made drastic cuts in public expenditures that had not been possible in better economic times. At the same time, the export competitiveness of Finnish firms was re-emphasized as a key policy goal. Also, individual citizens changed their behavioural patterns: people began to pay back their debts, work harder and many sought new training opportunities to upgrade their skills. As we can see, the Finnish economic crisis came with a silver lining: it reduced the society’s mental rigidities toward adjustment. Moreover, being a late-industrializing country, Finland had not become as deeply embedded in the old techno-economic paradigm as many older industrialized countries had. Thus, Finnish society has been quite flexible in its adjustment to the new technoeconomic environment. Some observers even think that Finland is a leading information society in the world (Castells and Himanen 2001). The internationalization of Finnish firms during the 1990s had an important impact on the competitiveness and growth of the Finnish economy. There were major changes in international trade patterns, portfolio investments and foreign direct investment (FDI) flows. In the 1990s, Finnish exports were characterized by increasing knowledge intensity. The share of high technology products in total exports increased from 6 per cent in 1991 to 21 per cent in 1999. Most of this increase can be attributed to the rapid growth of the telecommunications cluster. At the same time, the share of exports in GDP nearly doubled from 22 per cent in 1991 to 43 per cent in 2000. The rapid growth of high technology production and exports has created a ‘third leg’ for the Finnish economy besides the traditional forest and basic metal industries. Global markets have facilitated the specialization of Finnish firms into their core activities and narrow product niches, resulting in increasing scale and learning economies. Finnish capital markets also became more international in the 1990s. The liberalization of the Finnish capital markets began in the mid-1980s and the last restrictions on cross-border capital flows and foreign ownership were removed in 1993 (Pajarinen, Rouvinen and Ylä-Anttila 1998). Since then, the foreign
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ownership of the Helsinki Stock Exchange (HSE) listed shares has increased rapidly and approached 70 per cent in 2001 (HSE 2002). This makes the HSE one of the most internationalized stock exchanges in the world. The rapid growth of foreign portfolio investment has improved the availability of equity capital for Finnish firms and made the Helsinki Stock Exchange a more liquid marketplace (Pajarinen, Rouvinen and Ylä-Anttila 1998). The increased foreign ownership has also pushed the corporate governance practices of large Finnish firms toward the Anglo-Saxon ‘shareholder value’ approach. Thus many firms have terminated their supervisory boards and restructured their management boards. In the latter, external expert members have increasingly replaced management representatives. The Finnish firms have also created new incentive mechanisms (such as stock options) for their managements to meet the demands of international investors (Huolman, Walden, Pulkkinen, Ali-Yrkkö, Tainio and Ylä-Anttila 2000). The new efficiency-oriented governance practices mark a clear break from the stakeholder-oriented and corporatist governance structures of the 1980s. Both outward and inward direct investment began to grow more rapidly in Finland in the mid-1980s. However, the outward FDI flows outpaced the inward flows as many large Finnish firms operating in sheltered domestic markets (such as insurance companies and banks) as well as some state-owned companies holding monopolistic market positions (chemicals, oil) increased their foreign investments. The poor financial performance of these investments and the subsequent disinvestments suggest that many of the original investments were made without the necessary ownership-specific advantages underlined by the established FDI theories (see Dunning 1993). These investments can be better explained with some less well-known theories of FDI that emphasize the monopolistic rents of large firms in domestic markets and their exploitation by the management in foreign countries (Cowling and Sugden 1987). After a brief pause in the early 1990s, the rapid growth of outward and inward FDI resumed in 1993. The outward flows continued to outpace the inward flows during the rest of the decade. In the late 1990s, the stock of outward investment was about two times larger than the stock of inward investment. Pajarinen, Rouvinen and Ylä-Anttila (1998) discuss the impacts of FDI on the Finnish economy during the 1990s. The economic impacts of outward FDI are not very clear but empirical research suggests that the cross-border expansion of large Finnish firms improved their international competitiveness in most cases. However, at the same time, the investments also somewhat reduced the firms’ domestic employment. The growth of inward FDI had more positive than negative effects on Finnish industry. On average, foreign-owned firms in Finland have grown faster and they have been more profitable than indigenous firms. Foreign firms have also provided new technology as well as new
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marketing and organizational skills to their Finnish subsidiaries. All this has reinforced the competitiveness of the Finnish economy. The role of government in the Finnish economy was also reshaped after the crisis of the early 1990s. Instead of physical investments, the new strategy emphasized economic efficiency, innovation and growth (MTI 1996). Using Dunning’s (1992) term, Finland moved towards a ‘macro-organizational’ policy approach that emphasizes the reduction of market failures as the core responsibility of the government. With the severe economic crisis in the background, this strategy was easy to understand. The Finnish economy was increasingly exposed to foreign competition and could not compete without world-class efficiency, productivity and value-adding capacity. Furthermore, the popular welfare state could not be financially supported without an efficient and competitive economy. Having a strong engineering orientation, the Finnish value-adding strategy was based on technological innovation. Policy-makers wanted Finland to become a true ‘knowledge-based society’ and the early success of the telecommunications cluster showed the potential of this strategy. As a result, the role of technology policy became central in the new growth strategy. Perhaps as a reflection of the old input-driven strategy, increasing national R&D inputs became the central goal of technology policy in the late 1990s.
2.4
EMERGENCE OF A NEW MENTAL PARADIGM IN THE 1980s
The structural transformation of the Finnish economy and society in the early 1990s was triggered by the economic depression. However, the rapid advance and broad scope of this transformation can be explained by the availability of a competing and respectable mental paradigm that could be adopted once the postwar mental paradigm was discredited by the economic crisis. The key elements of this new market-oriented paradigm had already emerged in public discussion in the 1980s but they did not gain widespread support until the economic crisis. During the great uncertainty and insecurity of the early 1990s, the new paradigm offered clear guidelines for the restructuring process. Table 2.2 compares and contrasts the main characteristics of the postwar and the new mental paradigms in Finland. The two paradigms represent the shared cognitive frames, values and norms of the Finnish people before and after the economic crisis. The characteristics of the two paradigms are based on empirical studies of public discussion during the postwar period (Alasuutari 1996; Alasuutari and Ruuska 1999), interviews of key decision-makers right after the crisis (Kantola 2002), empirical research on the changing values of Finns during the 1980s (Helkama 1997) as well as the author’s own observations as an active
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member of Finnish society. The table also relates the mental paradigm shift to some of the key structural changes that took place during and after the crisis in the 1990s. The post-war mentality of Finnish society has been characterized as a period of ‘planned economy’ (Alasuutari 1996). There was a deep trust in the effectiveness of hierarchical planning as the key co-ordination mechanism in all sectors of society. It was generally felt that the small national economy needed to be protected and closed off from foreign influences and competition. A strong regulatory hand of government was also preferred in domestic markets. There was a general consensus that the Finnish economy was based on two main sectors, forest and metal industries, which produced the majority of the country’s export revenues. Due to the capital intensity of the main sectors, decision-makers viewed physical investments as the key competitiveness strategy of the Finnish economy. These investments were supposed to yield cost advantages through increased scale economies. As a result of the cyclical volatility of the leading sectors, occasional currency devaluations were accepted as a necessary complement to this strategy. Particularly in the 1960s and 1970s, the main policy goal of government was generally believed to be social and regional equality. Sweden was considered to be a good policy-making benchmark with its highly developed welfare state. The strong role of government was reflected in assumptions about the role of citizens. They were considered to be mere governance subjects who do not always know what is in their best interest. This gave rise to paternalistic alcohol, education, mass communication and cultural policies. Since the late 1960s, central labour market organizations were also considered to be legitimate partners in the public policy-making process. Finnish national culture was very homogeneous during the postwar decades. Collective, conservative and protectionist values were widely shared and supported the other elements of the mental paradigm. The key elements of the new mental paradigm emerged in the 1980s when the growing structural problems and inefficiencies of the Finnish economy made the discussion of new ideas increasingly legitimate. This new paradigm was based on the belief in the efficiency of free, open and competitive markets as a co-ordination mechanism of advanced economies and societies. The new market-oriented policy regimes in the United States and the United Kingdom gave Finland a practical example of the new paradigm in use. The demise of Keynesian economics in the stagflation of the 1970s and the subsequent rise of neoclassical economics provided scientific support for the new ideas. The new mental paradigm involved a new engine of economic growth: the high technology industries. The growing problems with the investment-driven growth strategy focused attention on the emergent high technology sector that was not as dependent on price and cost advantages and successive devaluations
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as the forest and basic metal industries. The strategy of knowledge-intensive, high technology, and high value-added production was increasingly seen as the only viable one for a country with an increasing standard of living and high cost levels. The new mental paradigm also included new thinking about the role of government. The idea of the citizen as the customer of public sector services has gained ground since the early 1980s. However, a more fundamental philosophical shift did not take place until the economic crisis of the early 1990s. In that shift, economic growth and efficiency replaced equity as the most important goal of government activities (MTI 1996). The economic crisis also challenged the active role of general labour market organizations in public policy-making. The idea of a clear ‘division of labour’ between the labour market organizations and the public policy-makers became increasingly popular among economists and policy-makers themselves. Many felt that the labour market organizations had gained too much political power in society and had become the key stumbling blocks to structural adjustment. Also, the homogeneity of Finnish national culture began to unravel in the 1980s. Individualism, readiness-for-change, freedom and openness became increasingly important for Finns during the 1980s (Helkama 1997). As we can see from Table 2.2, the structural changes made in the 1990s were based on the new mental paradigm. However, some features of the old paradigm have remained strong in the changed techno-economic environment. In particular, the goal of social and regional equity is still very important among Finns and large parts of the population still favour corporatist decision-making that gives the central labour market organizations considerable political power. Indeed, after a pause during the economic crisis, the government renewed its support for central labour market agreements and corporatist policy-making.
2.5
CONCLUSION
This chapter has argued that a system’s capacity for structural change is the key to its economic performance in a rapidly changing environment. The structural change capacity depends on the collective learning and ‘unlearning’ processes through which the members of the system change their collective frames, values, norms, ideologies and theoretical frameworks, their shared mental paradigm. Although most industrial economies are struggling with structural adjustment problems, there is surprisingly little research on the social innovation processes which link changes in mental paradigms, socio-institutional structures and economic performance (see for example Huff and Huff 2000; Huntington and Harrison 2001). More research about social innovation processes is urgently needed.4
Mental and structural change in Finland during the 1980s and 1990s Structural changes
Co-ordination mechanism
Hierarchical planning
Market mechanism
New organizational arrangements (corporate governance reform, networking), new public management (privatization, management by objectives, decentralization, law on public procurement)
National economy
Closed and regulated
Open and competitive
Deregulation of financial markets and foreign investments, increasing exports and FDI by Finnish firms, EU membership, deregulation of markets for goods and services, improvements in competition law and its enforcement, EMU membership
Key sectors of economy Forest and metal industries High technology sectors Rapid growth of the telecommunications sector Physical investments and currency devaluations
Knowledge and technology
Main goal of government
Social and regional equality
Economic efficiency, Reform of industrial policy (reduction of investment and regional innovation, and growth subsidies, increase in R&D subsidies, improving effectiveness of competition policy, development of service sector), cuts in public income transfers (incl. reduction in ‘incentive traps’)
Role of citizens
People to be governed
Customers to be served Decentralization and reform of public sector activities (management by objectives, one-stop service)
Role of labour market organizations
Strong participation in labour market and public decision-making (corporatism)
Collective agreements Two successive rounds of industry-level agreements in the early 1990s, then return to the old paradigm and to economy-wide on industry or firm basis; no participation agreements in public policy-making
Culture
Homogeneous values and preferences, collectivism, conservatism, national protectionism
Heterogeneous values and preferences, individualism, readiness for change, freedom and openness
Abolishment of paternalistic regulation of alcohol, communication (TV, radio), education and cultural policies and growth of foreign immigration to Finland
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Rapid growth in R&D investments, development of VC markets, creation of the polytechnic system, management by objectives introduced in universities, increasing numbers of new PhDs
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Future research could examine the nature of social innovation processes at different levels of analysis: organizational subunits, firms, sectors, regions, nations and supranational organizations (such as the EU, NAFTA). Although we expect the general change process to be rather similar in different types of systems, differences in scope, history and context could elaborate it with interesting new elements and nuances. The new studies should pay special attention to the links among mental changes, structural changes and performance. How exactly do mental changes influence structural decisions and these, in turn, economic performance? Social innovation processes are shaped by many factors that could not be analysed in this chapter. The media, civil society (social movements, political parties, special interest groups), education and socialization systems and research institutions play a major role in bringing new issues onto the public agenda and influencing the shared frames, values, norms and ideologies of different systems’ participants. Their role needs to be analysed carefully in different contexts. Many policy-makers are finding it very difficult to deal with structural change issues. Better knowledge about the nature, drivers and constraints of social innovation processes could help them to formulate policies that facilitate structural change and promote the economic success of their systems. It is rare that a social scientist has such a strong social demand for his or her research.
NOTES * The theoretical part of this chapter has benefitted from discussions with Professor Risto Heiskala. The theory and case study contain some previously published material from Hämäläinen (2003a and 2003b). 1. There are numerous historical examples of both rapidly adjusting and successful and stagnant and deteriorating socio-economic systems during major environmental transformations. At the firm level, the declining competitiveness and performance of the once mighty IBM in the late 1980s and its subsequent recovery in the mid-1990s provide an example of both trends (Hämäläinen and Laitamäki 1993; see also Christensen 1997). The decline of the US auto industry in the 1980s illustrates the fate of a stagnant national sector in the face of a rapidly changing competitive environment (Dertouzos, Lester and Solow 1989; Womack, Jones and Roos 1991). Silicon Valley and Massachusetts provide examples of dynamically adjusting regional systems (Best 2001; Saxenian 1994), whereas Baden-Württemberg represents a stagnant and gradually declining region (Cooke and Morgan, 2000). The rapid structural change and good economic performance in the United States in the late 19th and early 20th centuries and the institutional rigidity and relatively poor performance in Great Britain during the same period provide examples of national systems during transformation (Freeman 1995). In the current transformation, the rapid structural change of Finland (Section Two of this chapter) can be contrasted with the decade-long stagnation of Japan and the structural rigidities of Germany. 2. Sometimes the multiple roles of individuals as members of different communities get mixed up and they may face contradictory frames, incentives and behavioural rules. This may create an unpleasant feeling of uncertainty and cognitive dissonance (Festinger 1957). The presence of
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overlapping and competing institutional frameworks may also undermine the stability of each (Scott 2001, p. 183). 3. Changes in social environment may involve changes in collective needs and preferences or in the distribution of power among different groups (Oliver 1992). 4. The Finnish National Fund for Research and Development, Sitra (www.sitra.fi), started a research project on collective learning, social innovations and structural adjustment in autumn 2002. This project involves both theory development and national, regional and sectoral case studies.
REFERENCES Alasuutari, Pertti (1996), Toinen tasavalta: Suomi 1946–1994, Tampere: Vastapaino. Alasuutari, Pertti and Petri Ruuska (1999), Post patria: Globalisaation kulttuuri Suomessa, Tampere: Vastapaino. Arthur, Brian W. (1994), Increasing Returns and Path Dependence in the Economy, Ann Arbor, MI: University of Michigan Press. Best, Michael H. (2001), The New Competitive Advantage: The Renewal of American Industry, Oxford: Oxford University Press. Castells, Manuel and Pekka Himanen (2001), Suomen tietoyhteiskuntamalli, Helsinki: WSOY. Christensen, Clayton M. (1997), The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston, MA: Harvard Business School Press. Cooke, Philip and Kevin Morgan (2000), The Associational Economy: Firms, Regions, and Innovation, Oxford: Oxford University Press. Cowling, K. and R. Sugden (1987), Transnational Monopoly Capitalism, New York: St. Martin’s Press. Dertouzos, Michael L., Richard K. Lester and Robert M. Solow (1989), Made in America: Regaining the Productive Edge, New York: Harper Perennial. Dunning, John H. (1992), ‘The Global Economy, Domestic Governance, Strategies and Transnational Corporations: Interactions and Policy Implications’, Transnational Corporations, 1, 7–45. Dunning, John H. (1993), Multinational Enterprises and the Global Economy, New York: Addison-Wesley. Festinger, Leon (1957), A Theory of Cognitive Dissonance, Evanston, IL: Row, Peterson and Company. Freeman, Christopher (1995), ‘History, Co-Evolution and Economic Growth’, IIASA WP-95–76, September. Hämäläinen, Timo (2003a), National Competitiveness and Economic Growth: The Changing Determinants of Economic Performance in the World Economy, Cheltenham: Edward Elgar. Hämäläinen, Timo (2003b), ‘A Theory of Systemic Adjustment and Economic Growth: The Case of Finland’, in H. Peter Gray (ed.) Extending the Eclectic Paradigm in International Business: Essays in Honor of John Dunning, Cheltenham: Edward Elgar. Hämäläinen, Timo and Jukka Laitamäki (1993), ‘A Value-Added Theory of the Firm: An Explanation for the Destruction of Large Hierarchies in the Computer Industries’, Paper presented to Strategic Management Society Conference, September, Chicago. Heilbroner, Robert and William Milberg (1997), The Crisis of Vision in Modern Economic Thought, New York: Cambridge University Press.
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Helkama, Klaus (1997), ‘Arvojen ja ihmiskuvan muutos’, in Timo J. Hämäläinen (ed.), Murroksen aika: Selviääkö Suomi rakennemuutoksesta?, Helsinki: WSOY, pp. 241–64. HSE (2002), web-pages of the Helsinki Stock Exchange at: www.hse.fi Huff Anne S. and James O. Huff (2000), When Firms Change Direction, Oxford: Oxford University Press. Huntington, Samuel P. and Lawrence E. Harrison (2001), Culture Matters: How Values Shape Human Progress, New York: The Free Press. Huolman, Mika, Pia Walden, Matti Pulkkinen, Jyrki Ali-Yrkkö, Risto Tainio and Pekka Ylä-Anttila (2000), Omistajien etu – kaikkien etu?, Helsinki: Taloustieto. Kantola, Anu (2002), Markkinakuri ja managerivalta: Poliittinen hallinta Suomen 1990luvun talouskriisissä, Tampere: Loki-kirjat. Kogut, Bruce and David Parkinson (1993), ‘The Diffusion of American Organizing Principles to Europe’, in Bruce Kogut (ed.), Country Competitiveness: Technology and the Organizing of Work, New York: Oxford University Press. Lipsey, Richard G. (1997), ‘Globalization and National Government Policies: An Economist’s View’, in John H. Dunning (ed.), Governments, Globalization, and International Business, London: Oxford University Press. MTI (1996), ‘A New Outlook on Industrial Policies: From Global Economic Change to Sustainable Growth’, Finnish Ministry of Trade and Industry Publications, 4/1996. Oliver, Christine (1992), ‘The Antecedents of Deinstitutionalization’, Organization Studies, 13, 563–88. Olson, Mancur (1982), The Rise and Decline of Nations, New Haven, CT: Yale University Press. Pajarinen Mika, Petri Rouvinen and Pekka Ylä-Anttila (1998), Small Country Strategies in Global Competition: Benchmarking the Finnish Case, Helsinki: ETLA/Sitra. Parsons, Talcott (1966), Societies: Evolutionary and Comparative Perspectives, Englewood Cliffs, NJ: Prentice Hall. Pohjola, Matti (1996), Tehoton pääoma, Helsinki: WSOY. Powell, Walter W. and Paul J. DiMaggio (1991), The New Institutionalism in Organizational Analysis, Chicago: The University of Chicago Press. Saxenian, Annalee (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge, MA: Harvard University Press. Schienstock, Gerd and Timo Hämäläinen (2001), Transformation of the Finnish Innovation System: A Network Approach, Sitra Report Series 7, Helsinki: Sitra. Scott, Richard W. (2001), Institutions and Organizations, Second edition, Thousand Oaks, CA: Sage. Seo, M. and W.E. Douglas Creed (2002), ‘Institutional Contradictions, Praxis, and Institutional Change: A Dialectical Perspective’, Academy of Management Review, 27(2), 222–47. Womack, James P., Daniel T. Jones and Daniel Roos (1991), The Machine that Changed the World: The Story of Lean Production, New York: Harper Perennial.
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PART II
Industries and firms
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3. The evolution of the Finnish ICT cluster Laura Paija and Petri Rouvinen 3.1
INTRODUCTION
Despite bankrupted dotcoms and collapsed market valuations of technology companies, it is generally agreed that information and communication technologies (ICTs) have indeed induced a new techno-economic paradigm or the third industrial revolution. Consequences of this revolution have been particularly pronounced in Finland. In the late 1990s Finland, besides the United States, became known as the leading new economy, or a country where ‘… the 21st century is in beta’ (Wired magazine, September 1999). This reputation was primarily earned by the rapid growth of and heavy specialization in mobile telecommunications equipment manufacturing. As a user of ICT, Finland is advanced but not exceptional as compared to other high-income countries (see, for example, Koski, Rouvinen and Ylä-Anttila 2002a). Koski, Rouvinen and Ylä-Anttila (2002b) show that ICT-related production has an intensifying concentration tendency and that laggards in ICT provision rarely catch up, let alone leapfrog the leaders. In other words, originally ICTspecialized countries tend to become more so. Finland is a rare exception to this rule. During the 1990s it went from being one of the least ICT-specialized industrialized countries to becoming the most specialized one. Figure 3.1 below shows the situation in the year 2000. Finland is the only country that ranks high according to all of the three indicators considered. This chapter studies the evolution of the Finnish ICT sector as well as the dynamics and interactions behind its success. We also discuss future developments and speculate as to what might lie ahead.
3.2
NATIONAL INNOVATION SYSTEM AS A BASIS FOR COMPETITIVENESS
Success in the Finnish ICT sector cannot be considered exclusively an internal phenomenon of the branch. Rather, the growth of ICT provision in Finland to 47
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Industries and firms ICT value added (% of business sector tot., 2000)
Ireland Finland Korea USA New Zealand Sweden Hungary UK Netherlands Belgium Japan Czech Rep. Norway Canada Denmark France Portugal Austria Australia Spain Italy Germany Mexico Slovak Rep. Greece
Finland Sweden Canada Japan UK Netherlands Belgium France Norway Denmark Austria USA Korea Italy Australia Czech Rep. Spain Mexico Germany Portugal
0 4 8 12 16 Total Communic. & other eqt Computer & other eqt Services
Source:
ICT employment (% of business sector tot., 2000)
R&D in ICT (% of business sector tot., 2000)
Finland Korea Sweden Japan USA Canada Ireland Netherlands Germany France Belgium UK Denmark Norway Italy Australia Spain Czech Rep. Poland
0 2 4 6 8 Communic. & other eqt Computer & other eqt Services
10
0 1 Manufacturing Services (for those avail.)
2
OECD (2002)
Notes: ICT sectors as defined at the source. The reference year may vary. See the original source for further notes
Figure 3.1
ICT sector value added, employment and R&D
its present status should be considered by acknowledging cross-sector interactions in the national innovation system. Evidence from international comparisons (EU 2000; OECD 1999) indeed suggests that co-operation between Finnish companies and research organizations is exceptionally broad. We argue below that one of the key strengths of the Finnish ICT sector is intense interorganizational co-operation both within the industry and with other industries and the research sector. While the transition of Finland from a resource-based economy into one driven by knowledge may seem sudden, its foundations were in fact laid as far back as in the 1800s. Yet, behind the evolution of the ICT cluster, there is a complex and self-strengthening development process; it is apparent that the major processes were set in motion by public sector decisions. The promotion of industrial policy aims was not always the reason for these decisions, although the Finnish ICT cluster looks, in hindsight, like the result of an industrial policy master plan. Actions of public bodies have indeed been mostly beneficial to the Finnish ICT cluster despite the fact that the goals and focal areas of industrial policy have undergone major changes in postwar Finland.
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In what follows we use Porter’s (1990) cluster concept with some refinements (see Hernesniemi, Lammi and Ylä-Anttila 1996) to carry out our analysis. We view clusters as networks of organizations, public and private, in which competitive advantage grows from dynamic interaction between actors. Cluster relations disobey sectoral boundaries – they spur innovation and upgrading through spillovers and knowledge transfers. Generally speaking, the competitiveness of a cluster is dependent on the political, institutional and cultural environment within which it operates. The growth potential of a cluster is also dictated by changes in the international environment, not to mention incidental events, as we shall see below in the context of the Finnish ICT sector.
3.3
THE STRUCTURE OF THE ICT CLUSTER: GULLIVER AMONG LILLIPUTIANS
The structure of the Finnish ICT cluster may be depicted as in Figure 3.2. Firms producing ICT equipment and services form the key industries of the cluster. The convergence of networks, terminals, services and industries has made it increasingly difficult to categorize firms in traditional industries. It is therefore more convenient to consider them en bloc, or as a value chain producing information and communication services as their final output. Looking at the firms in the core of the cluster, totalling approximately 6000, Nokia is in a class of its own. There are few other Finnish ICT companies whose Supporting industries Contract manufacturing Components Education and R&D
Associated services
Key industries Digital content Packaging Network infrastructure
Related industries Traditional media Entertainment Other services
Applications software Operation Buyers/Appliers
ICT consultancy VC finance Standardization
Source:
End-user terminals Portals
Paija (2001)
Figure 3.2
ICT cluster framework
Individuals Organizations
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sales, in general, exceed 200 million euros, while Nokia’s domestic sales were over 450 million euros in 2001. The operator sector is highly competitive and has been undergoing a strong restructuring process during recent years – which, in fact, is rather the rule than an exception during its 100-year history of multi-operator market structure. Three camps of national operators share the market. The largest camp, led by Sonera, the former public posts and telecom office, has around half of the total market revenue and connections, while the second largest camp holds one third, and a group of small local operators has practically grabbed the rest. Foreign entrants have not succeeded in gaining any significant position (status as of early 2003). The government had a long-standing objective to find a partner to Sonera in a major foreign operator. Finally in 2002, a merger agreement with Swedish Telia was reached. Finding a partner was delayed during the dotcom boom by inflated, and then after the bust, by deflated stock valuations and a heavy financial burden left behind by Sonera’s aggressive growth attempts. Indeed, Sonera has been so far the only national operator to make major attempts to become an important actor on the international stage. These have included joint ventures in several foreign markets, and particularly, acquisitions of stakes in high-priced 3G licences that later lost most of their market value. The company also made significant investments in its endeavour to establish a global position as a provider of mobile transaction security and mobile Internet applications. The eventual failure of Sonera’s ambitious international expansion and the consequent public and political turmoil it stirred up may have obscured somewhat the fact that the company has highly advanced technological knowhow accumulated over its long history. As we shall discuss below, Sonera has been one of the pioneering developers of mobile technologies and a major sparring partner of the early Nokia. Despite advanced and even pioneering expertise in some application areas, few Finnish software companies have gained global recognition. However, Linux is a particular chapter in Finnish ICT history: initiated by a Finnish student, Linus Torvalds, in the 1980s, the open-source operating system has been the only one to challenge the predominance of Microsoft. Other actors with an international position operate mainly in narrow but fast growing niches, such as data security, and network management and service applications. Digital content provision includes content creation and ‘packaging’, that is, combining and tailoring contents and services for various users and channels. In this part of the value chain we encounter actors from various ICT subsectors: software companies, operators, equipment manufacturers and media houses. Indeed, there is a battle over access to end-users among content, service and terminal providers, since it has been regarded as an opportunity to direct the development of the business.
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In our cluster framework, however, content substance is primarily created in related industries, which, by definition, are those whose products are complementary to those of the key industries. Therefore, companies using ICT infrastructure as a distribution channel can be loosely referred to as ‘content producers’. It is common to count, for instance, museums, libraries, printing houses, business consulting firms, and the whole of the music and motion picture industries in ‘the content industry’, yet only a fraction of their production is digitally available on the network. However, all speech, messages, data, and pictures carried in the communications system have content. From this viewpoint, all mobile subscribers are content producers. In the same vein, for example, transportation companies publishing their time schedules, or business companies offering their annual reports digitally are important content providers. Despite the difficulty in defining content-producing industries, however, there is little dispute over the decisive role of content in generating consumer demand for sophisticated communications equipment, which will ultimately determine the value of ICT business and investments. Yet, to date, somewhat simple applications, such as ringing tones, icons and short message services, represent the most popular mobile services. The cluster also embraces those sectors that enhance the competitive advantage of the key industries or improve their functional preconditions. In the Finnish context these include, for example, technology suppliers. Along with Nokia’s focused divestment of non-core activities in the 1990s, the role of suppliers became more central in ICT cluster development. During the 1990s the sector developed specialized competencies in certain technology areas (such as ASIC, automation, hybrid circuits, printed circuit board production and surface mounting technology, precision mouldings, rf-filters, and silicon wafers). Finnish supplier products are typically highly customized, while in using standard components the equipment manufacturers rely on mass producers’ imports. In the wake of Nokia’s global success, local suppliers have had no choice but to swiftly internationalize their operations, since a global presence is crucial for efficient outsourcing. For many suppliers it has opened up unforeseen business growth and raised the level of business skills. The Finnish education system has succeeded in producing critical human skills to nourish the development of the cluster. The main universities were already established by the end of the 1960s. Today, there are 12 postgraduate schools providing education in information technology. Since the 1980s Nokia has systematically promoted to the public its idea of education and knowledge as the basis of national advantage. The government has indeed been responsive to the demands of the ICT industry as to the content and volume of related education. During the second half of the 1990s, the intake in higher-level technical education increased to the extent that there were concerns about watering down the level of education with excessive intakes and stagnant budget
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financing. As universities are important recruitment forums, company representatives have also taken part in the planning and implementation of education. Lively interaction between science and industry has long traditions, yet there was a period of statutory separation around the 1970s when publicly financed science was kept clear from business interests. R&D between industry and universities, both collaborative and outsourced, has been since then an integral part of new technology development. Finally, the overall economic impact of ICT is likely to be even more powerful on its users than on its producers, since innovative applications of the technology are about to revolutionize traditional business models and increase productivity. In Finland, economies of scale have thus far benefitted mainly the supply side of mobile technology. The next critical question pertains to Finland’s capability to exploit advanced technology on the user side in order to enhance productivity in the rest of the economy.
3.4
THE ICT CLUSTER AS PART OF THE FINNISH ECONOMY
The impact of the ICT cluster growth on the Finnish economy was momentous during the 1990s. The share of GDP of the ICT cluster value added rose from 4 to 10 per cent.1 The increase was driven by the ICT manufacturing sector. Its value added grew by a multiple of 17 during the period, while total manufacturing did not even double (Figure 3.3). Nokia has an estimated 3 per cent share of GDP. In services, the difference between the ICT and total value-added growth rates was also large, but less dramatic. While the economy as a whole has failed to recover from the persistent unemployment that started during the recession of the early 1990s, recruitment in the ICT sector has been strong (Figure 3.3). It picked up in the mid-1990s, eventually exhausting the supply of skilled labour towards the turn of the millennium. The labour shortage was, at least temporarily, ‘resolved’ by the sudden global decline of the industry. The evolution of the structure of exports reflects Finland’s rapid metamorphosis from a resource-based into a knowledge-based economy (Figure 3.4). The ICT sector developed during the 1990s into the third main pillar of exports at the expense of the traditional metal and forest-based industries. Nokia accounts for approximately 20 per cent of national exports. The intensive increase in national R&D expenditure (see discussion below) has been driven by the ICT sector, and notably by Nokia. Excluding Nokia’s share of total R&D expenditure decreases Finland’s R&D intensity (R&D per GDP), according to one estimate, by one percentage point, to 2.4 per cent (Ali-
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Figure 3.3 Development of the ICT cluster versus the economy as a whole 1990–2001 (1990=100)
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Figure 3.4
Export shares by industry group
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Yrkkö and Hermans 2002). Still, even without Nokia, Finland would rank above the EU average in R&D intensity.
3.5
MULTI-ACTOR MARKET CULTIVATED TECHNOLOGICAL EXPERTISE
Even in worldwide comparison, the structure of Finnish telephony markets, originally established in the 1880s, was exceptional up until the worldwide telecom liberalization in the 1990s, as it enabled interaction between operators and equipment suppliers, unlike in most other countries which resorted to monopolies. The origin of the exceptional market structure was the fruit of the insight of the Finnish Senate, which was under the Russian Tsar’s reign at the time. Under the Telephony Decree of 1886, the Senate distributed numerous private licences to engage in telecommunications activity that circumvented Russian telegraph regulations. Indeed, at the peak of the 1930s there were over 800 private operators in Finland. After gaining independence in 1917, a state telecom operator was established to operate the telegraph and military telephone network left behind by the Russians, but the role of the private operators remained intact. Thus, from an early time on, private and public telecom markets co-existed in Finland, providing a favourable foundation for equal competition once the markets were liberalized in the 1990s. When monopoly markets were opened up elsewhere in the world, complicated ‘transitory’ regulation was often necessary to support the emergence of equitable competition (such as the breaking up of Ma Bell into baby bells in the US and price regulations in the UK). Additionally, Finnish telecom equipment markets were open to foreign suppliers, unlike in some other countries, where national equipment suppliers enjoyed a monopoly position. In Finland, the large number of operators enticed leading equipment suppliers to test their latest technology in Finland. Indeed, the interestedness of private operators in state-of-the-art technology was underpinned by the threat of the regulator-PTO’s (public telecom operator) takeover of under-performing telephony companies. As a result, the national telephony infrastructure quickly reached relatively high standards, and the first automated exchanges were introduced as early as in the 1920s (yet full automation of the national network continued until 1980). In order to integrate different manufacturers’ network equipment, operators had to develop technological expertise. This know-how was later exploited by the budding domestic component industry, in other words the ancestors of the later Nokia.
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CHALLENGING DEMANDS OF PUBLIC SECTOR INDUCED HIDDEN EXPERTISE
In three companies established around the turn of the 1920s – Salora, Suomen Kaapelitehdas (Finnish Cable Works) and Valtion Sähköpaja (State Electrical Workshop, later known as Televa) – radio technology was practised on the sidelines of main business activities by fervent engineers, often under the suspicion and opposition of conservative colleagues (Mäkinen 1995). In 1963, a call for tenders by the Finnish Army for a battlefield radio finally spurred companies into giving physical expression to their accumulated, but up until then somewhat hidden, expertise. Although the Army did not ultimately have the resources to purchase the system, its prototypes were later developed into the first commercial handsets. Later, several public bodies, such as the National Defence, the State Railways and the Coast Guard called for tenders for their demanding communications requirements, thus fostering the development of radio technology expertise.
3.7
NORDIC COLLABORATION IN NMT DEVELOPMENT GOT COMPANIES STRIVING
Co-operation between public authorities and the telecommunication equipment industry culminated in the creation of the NMT (Nordisk Mobil Telefon) network in the 1970s. Nordic telecommunications authorities aimed at creating competitive cross-country markets, and therefore the standards were made open and features such as roaming were included. At the start of the 1980s the Nordic countries formed the largest mobile communication market worldwide in terms of the number of subscribers, the equipment needs of which were served by a dozen suppliers. Mobira, a joint venture of Nokia and Salora, supplied the first handsets for the network. However, Finnish companies were neither ready nor willing to supply network technology in the starting phase of the NMT project. Eventually, under pressure from Finland’s national Post and Telegraph authority, Mobira, and later Tele-Nokia, started to manufacture network equipment (see for example Mäkinen 1995; Toivola 1992) – which was later to become the cornerstone of their development. The NMT system spread extensively to Europe and Asia, guaranteeing the Nordic companies an advantageous position in the new telecom industry. In certain countries, national equipment monopolies developed their own closed standards, which almost invariably remained local curiosities, while in the USA, AT&T spent years trying to persuade American telecom authorities of the
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potential of wireless communication. Application of the fixed telephony pricing principles we are used to (time-based, caller pays, no terminal subsidies by operators) created ‘normal’ mobile markets, unlike in those countries where divergent pricing distorted the structure of demand.
3.8
AMBITIOUS AND TARGET-ORIENTED INNOVATION POLICY HAS LONG ROOTS
A ‘high-road’ strategy, based on technology and expertise, has lifted both Finnish R&D investments and the networking of public and private actors to new heights. In the 1980s, long before the rise and fall of the ‘new economy’, Finnish technology policy began to emphasize information technology. The importance of science in national development was also more explicitly acknowledged. Somewhat ambitious target-oriented R&D policy was initiated in the early 1970s to lift Finland from its status as a below-average R&D investor (under 1 per cent of GDP at the time) to being among the leaders. This objective was first frustrated by the economic recession of the 1970s, but was obtained during the next decade when public appropriation to R&D increased yearly by some 10 per cent, being the OECD record rate. This was reflected in the knowledge intensity, technical development and productivity of industrial production: the share of high-tech exports rose from 4 to 11 per cent, while the output of the electric and electronics industry grew by 150 per cent. (Jääskeläinen 2001; Lemola 2001) Between 1985 and 1999, the share of R&D expenditure as a share of GDP doubled, reaching €3.75 billion. With its 3.5 per cent share in 2002, Finland ranked second, after Sweden, in the world in R&D input. During the 1990s, the share of the public sector fell from the 40 per cent target level to under 30 per cent of total R&D expenditure, being below the EU and OECD averages, owing partly to intensive private business investments. In 1987 the Science and Technology Council of Finland was established (on the basis of the Science Policy Council founded in 1963) to co-ordinate planning of policy on expertise and innovation. It brings the main economic stakeholders – government, industry, science and the labour markets – together around the same table and has a prominent position in shaping, co-ordinating and resourcing science and technology policy (Romanainen 2001). Given its broad and prestigious representation it is, even from an international perspective, an exceptional body. Finland’s persistent investment in technological development, even during the worst recession years of the early 1990s, is
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probably partly a result of the knowledge-driven national vision conceived at a ‘round table’. The changing direction of science and technology policy at the turn of the 1980s was also reflected in the establishment of the National Technology Agency (Tekes) in the administrative field of the Ministry of Trade and Industry. It prepares, co-ordinates and funds applied technological research and industrial R&D, and is in this field the main source of public funding. From the outset Tekes’ programmes have been influential forums for collaboration between research and business organizations. Tekes’ funding bears a catalytic effect on private R&D outlay: in company projects participants finance some 60–70 per cent of the budget. Nokia has been an important participant in Tekes’ projects, both in frequency and substance. Even though Nokia’s public funding through Tekes projects has, in monetary terms, experienced a growing trend over the past two decades, its share of the company’s sizeable total R&D investments has become insignificant (Figure 3.5). While one may wonder at the justification of public support for a highly profitable global market leader, one should, on the other hand, consider the returns on the public investment over time. First, Nokia’s programme participation has been crucial for the collaborative development of advanced communications technology with the intended side effect of producing spillovers between participants. Secondly, investments in such a company with 20
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Figure 3.5 Tekes funding to Nokia: Volume (millions of euros at 2000 prices) and share of Nokia’s R&D (%)
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advanced know-how and innovative capability have generated important social returns through positive impacts on employment, tax revenues, and the stock of national knowledge (Ali-Yrkkö and Hermans 2002), and have contributed to fundamental industrial restructuring. Another notable element in the national innovation system is the network of Centres of Expertise, which was initiated in 1994 to promote regional collaboration between the business, research, education, and public sectors. However, R&D activity is still highly concentrated around three urban areas, Helsinki, Tampere and Oulu, which account for almost 70 per cent of total expenditure.
3.9
LIBERALIZATION UNLOCKED TELECOM SERVICE DEVELOPMENT …
In Finland, the liberalization of telecom competition, being among the first in the world, took place between 1988 and 1994 and prompted a breakthrough in digital communications. Competition pressed prices down and led to mass markets for wireless communication and a test laboratory for the equipment industry. The impetus for the liberalization came from the private telecom sector, which since the 1960s had criticized the state monopoly in many new telecom services. The Imperial Telephone Decree, valid since 1886, could not give an unambiguous answer to the question of who had the right to transfer data and images on a network. In 1985, the establishment of a data carrier, Datatie, by certain operators and their corporate customers without a licence, set the wheels in motion for a series of changes in the telecommunications law. The liberalization of telecom competition culminated in the GSM (Global System for Mobile Communication) licence in 1990 granted to Radiolinja, founded by the private camp. Private companies had previously been refused an NMT licence due to the supposed social benefits arising from a ‘natural monopoly’. Radiolinja, too, had been established without a country-wide licence in 1988. Because regional licences permitted the construction of local mobile networks, telephone companies began to construct networks in their own areas, believing that the right to operate nationally would eventually be granted. The private licence application also caused much political wrangling. The Posts and Telecommunications authority put up heavy resistance – the demand for NMT services was just beginning to heat up. (Häikiö 1998; Toivola 1992; Turpeinen 1996) Eventually, on 1 July 1991, both Finnish mobile operators, Telecom Finland and Radiolinja were among the few who opened their GSM networks in accordance with the original schedule set up by the GSM MoU (memorandum of understanding; the group of organizations initiating GSM development). Nokia
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made its international premiere on the same occasion by providing Radiolinja’s network. In answer to Radiolinja’s challenge, Telecom Finland brought forward the launch date for their GSM services. Its original intention had been to keep in step with the other GSM development projects in Europe (Häikiö 1998).
3.10
… AND RESTRUCTURED COMPANY FINANCING
The liberalization of the capital markets and the ensuing rapid increase in venture capital gave decisive impetus to the growth, diversification and internationalization of the ICT cluster (Hyytinen and Pajarinen 2002). The lack of venture capital had been a major brake to new business activity right up until the 1990s. In 1995, over 80 per cent of small and medium-sized enterprises still had bank loans, but this figure had dropped to less than 50 per cent by 2000. During the same period private equity investments grew over tenfold, to €404 million (Rönkkö 2001). The subsequent phenomenon of mobile Internet companies surging to the forefront would not have been possible in financial markets like those of the past. Even Nokia would not exist in its current form without having had access to external capital. The Finnish National Fund for Research and Development (Sitra), to name one of the several state-owned investment organizations, has become an important venture capital investor, with a focus on seed financing and growth companies. Finnish Industry Investment Ltd, in turn, was founded in the 1990s to funnel the privatization proceeds of state-owned companies into the advancement of technology innovations through direct company and fund investments.
3.11 UNIVERSITIES AS HATCHERIES OF INNOVATIVE ACTIVITY Finns’ fascination with technology, reflected in the fact that they had, until quite recently, the highest penetration of mobile phones and the Internet in the world, has received its inspiration from the university world. Under the umbrella of academic freedom, the right to free education and an advantageous student grant system, there has been ample opportunity for innovative activity. Academic inventors also have the property rights to their own ideas, which is not the case in a number of other countries. Universities and the technology parks that sprout up around them have in some localities become major sources of new business activity. Academic careers often turn into entrepreneurial ones, in order to commercialize an innovation. Traditionally, students have done research for their theses in local companies and
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have already created jobs for themselves before graduating. Thus, the dynamo of pure and applied science has turned the innovation generator. In the 1980s, students brought the Internet, then a largely unknown concept, from the US to Finland before it went anywhere else. The world’s first graphicbased Internet browser was developed in the IT class of the Helsinki University of Technology in 1992, a year before Mosaic and Netscape. The inventive students were not, however, sufficiently interested in commercializing the browser. But IT students Tatu Ylönen (SSH encryption programme) and Linus Torvalds (Linux operating system) went on to become legends in their own time. The main reason why Nokia thrives in Finland is that it can draw on the local environment of advanced expertise in ICT. Despite Nokia’s global network of research units, a good 60 per cent of the company’s R&D work is carried out in Finland. Towards the turn of the millennium it seemed that the shortage of experts was going to be the biggest challenge to the Finnish ICT cluster. As a swift response to the demands of the industry, the government multiplied openings in higher education institutions: between 1993–98, the total intake in universities nearly doubled, and in polytechnics it almost tripled. However, growth in educational resources did not keep pace with the growth in enrolment. Finland ranked 14th – well below the OECD average – in a 1997 comparison of expenditure per student at the tertiary level (OECD 2000). The recent economic slowdown has alleviated, superficially, the labour shortage in the sector. But this is no lasting solution. The building of the information society requires years and an increasing range of employees who, in turn, will need to master increasingly demanding technologies, not only in the ICT-producing sectors but also in those applying the technology.
3.12
COINCIDENTAL EVENTS INTERVENE IN CLUSTER DYNAMICS
Coincidental events are also an important factor in explaining the success of the cluster, as illustrated by the following cases. Radiolinja’s GSM licence, gained at the beginning of the 1990s, was perfectly timed – although it was hardly noticed then – to coincide with the beginning of world telecom market liberalization. Finland offered a digital mobile phone service, among the first in the world, on a network it had built itself. The international attention gained by the event brought Nokia back from the brink of collapse and thrust it into an export market spiral. As telecom monopolies crumbled around the world, the new arrivals eagerly invested in competing networks. Competition caused lower prices and, hence, a boom in the demand for mobile phones. It is funny to think
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where Finland would be now if private telecom companies had been granted the analogue NMT network licence. The simultaneous recession caused the labour force in Finland to move swiftly into the new growth sector. The global IT breakthrough and, particularly, the commercial expansion of the Internet both coincided with this cycle, thus providing a new development platform for Finnish technology innovations. The integration of mobile and Internet technologies turned Finland into a digital icon. In hindsight, it seems almost ludicrous that the political wrangling over the GSM licence at the beginning of the 1990s was largely an ideological debate that did not even raise the issues – which were later obvious – of the economic and social effects that mobile communications competition and an early transition to digital telecom services would have. It is hard, however, to blame the decision-makers of the time for being short-sighted. At the beginning of the 1990s both the Finnish economy and Nokia were still in a very depressed state before the real take-off started. As this very general examination of the evolution of the ICT cluster shows, the development of the competitiveness of a country and its companies is closely bound up with the operating environment and its internal dynamics. A study coordinated by the OECD (2001), comparing the competitiveness of ICT clusters from different countries and the economic policy that affects it, confirmed this view. There is no such thing as a universally applicable ‘cluster policy’ panacea. The best way to encourage more innovation and competitiveness is to create a framework for uninhibited interaction between cluster operators, both private and public.
3.13
FINNISH ICT CLUSTER AT A CROSSROADS
Although the scope of the Finnish ICT cluster has broadened in recent years, it remains highly specialized in mobile telecommunications. The cluster has benefitted greatly from having a powerful locomotive and system integrator, Nokia. Although smaller Finnish companies have made efforts to decrease their dependence on their key customer, their fortunes are still tied to it. Nokia has been able to maintain and even strengthen its position in global competition, but the fact that the whole sector is in crisis remains. Liberalization and de-regulation of telecommunications fuelled the roaring 1990s. Another important policy-related issue was standardization. The Finnish ICT cluster benefitted greatly from the introduction of NMT as the Scandinavian-wide first-generation (1G) standard, although Motorola retained its leadership over Ericsson and Nokia in the analogue era. Upon the transition to digital technologies, Nokia especially bet heavily on GSM as the second-
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generation (2G) standard, which eventually commanded three quarters of the worldwide user base. In the mid-1980s, the International Telecommunications Union (ITU) assumed an active role in the introduction of the third-generation (3G) standards. Although ITU pushed for one worldwide standard, eventually three became accepted in International Mobile Telecommunications (IMT2000) guidelines: W-CDMA (better known as UMTS, Universal Mobile Telecommunication System), CDMA2000 (promoted in particular by the US provider Qualcomm) and the Chinese TD-SCDMA. Europe attempted to maintain its lead in mobile telecommunications by pushing for rapid deployment of UMTS. In many European countries radio spectrums for 3G operations were auctioned for over €100 billion in total. It soon became clear that deployment and diffusion would be slower, network building costs higher and expected revenue per user lower than the licensees had anticipated. While the auctions were designed to maximize the immediate payoff for the public good, the long-term effects were unanticipated. The rules of the auction explicitly prohibited secondary trading and defined how and when and by whom the 3G networks were to be set up. Thus, the operators were not making a technology or even a business decision – they were deciding whether they wanted to be in the (mobile) telecommunications business, in other words, it was a question of existence. Currently the operators’ indebtedness due to auctions combined with the bearish financial market is holding back the deployment of 3G networks. The main benefit of 2G as compared to 1G is improved voice quality. The key promise of 3G is improved data communication. So far voice has been the key driver of mobile communication, although data is gaining ground. Upon bidding for a spectrum, the operators seem to have assumed a rapid and large shift from voice to data. Whereas in Europe the ‘mobile Internet’ was largely considered a telecommunications extension, the US discussion revolved around expanding the wire-line Internet architecture (wireless local area networks, WLANs, also known as 802.11x, where x refers to the version) to the wireless world. Arguably a combination of 2G and WLAN could be used to reach the goals of 3G in a most cost-efficient manner, although it is expected that 3G and WLANs will co-exist and complement each other. They also embody somewhat different business models: ‘smart’ networks, ‘dumb’ terminals and closedness characterize the telecommunications world, while the information technology world features the opposite. As a consequence, the respective leaders of their industries, Nokia and Microsoft, are increasingly at odds. Nokia has responded to the challenge by attempting to imitate the success of open-source software; Microsoft is trying to leverage on the vast user base of its PC operating system(s). In the late 1990s there was over-investment in virtually all ICT-related activities. In hindsight it is clear that at some point the maturing of the market would naturally end the era of double-digit annual growth rates. Thus, some
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levelling-off was expected. The worldwide recession and the failed introduction of 3G added to the insult. From the point of view of the Finnish ICT cluster, however, the key question is, how will the wireless culture at large evolve, in other words, what kind of blend of information technology and telecommunications will the wireless future be? Depending on the actual configuration, Finland may stay on the cutting edge and continue to serve as a useful testing ground for new technologies or it may have to play catch up with respect to some other hotspots.
NOTE 1. We approximate the ICT cluster with the following branches (SIC-95): 30 Office, accounting and computing machinery, 32 Radio, TV and communications equipment, 64 Post and telecommunications, 72 Computer and related activities.
REFERENCES Ali-Yrkkö, Jyrki and Raine Hermans (2002), Nokia Suomen innovaatiojärjestelmässä, Discussion paper 799, ETLA (The Research Institute of the Finnish Economy). EU (2000), Towards a European Research Area (COM (2000)6). Finnish National Board of Customs, ‘Statistical Service’. Häikiö, Martti (1998), Alkuräjähdys – Radiolinja ja Suomen GSM-matkapuhelintoiminta 1988–1998, (The Big Bang of the GSM Mobile Phone Revolution. The Story of Radiolinja, Finland, 1988–1998, with an English summary), Helsinki: Edita. Häikiö, Martti (2001), Nokia Oyj:n historia, (The History of Nokia plc), Helsinki: Edita. Hernesniemi, Hannu, Markku Lammi and Pekka Ylä-Anttila (1996), Advantage Finland, Helsinki: Taloustieto. Hyytinen, A. and M. Pajarinen (2002), Financing of Technology-intensive Small Businesses: Some Evidence on the Uniqueness of the ICT Industry, Discussion paper 813, ETLA (The Research Institute of the Finnish Economy). Jääskeläinen, Jari (2001), Klusteri tieteen ja politiikan välissä – teollisuuspolitiikasta yhteiskuntapolitiikkaan, (Cluster – Between Science and Policy: From Industrial Policy to Social Policy, with English summary), ETLA Series A33, Helsinki: Taloustieto. Koski, Heli, Petri Rouvinen and Pekka Ylä-Anttila (2002a), ‘ICT Clusters in Europe: The Great Central Banana and Small Nordic Potato’, Information Economics and Policy, 14 (2): 145–65. Koski, Heli, Petri Rouvinen and Pekka Ylä-Anttila (2002b), Tieto ja talous – mitä ‘Uudesta taloudesta’ jäi, Sitra Series, 253, Helsinki: Edita. Lemola, Tarmo (2001), Tiedettä, teknologiaa ja innovaatioita kansakunnan parhaaksi, Working paper 57/01, Espoo: VTT (Technical Research Centre of Finland). Mäkinen, Marco (1995), Nokia Saga, Jyväskylä: Gummerus. OECD (1999), Science, Technology and Industry Scoreboard – Benchmarking Knowledge-based Economies, Paris: OECD.
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OECD (2000), Education at a Glance, Paris: OECD. OECD (2001), Innovative Clusters: Drivers of National Innovation Systems, Paris: OECD. OECD (2002), Measuring the Information Economy, Paris: OECD. OECD/STAN, ‘Structural Analysis Industrial Database’, (online subscription service), Paris: OECD. Paija, Laura (2001), ‘The ICT Cluster in Finland – Can We Explain It?’, in Laura Paija (ed.), Finnish ICT Cluster in the Digital Economy, Helsinki: Taloustieto. Porter, Michael. E. (1990), Competitive Advantage of Nations, London: Macmillan Press. Romanainen, Jari (2001), ‘The Cluster Approach in Finnish Technology Policy’, in OECD (ed.), Innovative Clusters: Drivers of National Innovative Systems, Paris: OECD. Rönkkö, Perttu (2001), ‘Growth and Internationalization of Technology-based New Companies: Case Study of Eight Finnish Companies’, in Laura Paija (ed.), Finnish ICT Cluster in the Digital Economy, Helsinki: Taloustieto. Toivola, Keijo (1992), Poimintoja teletoimen historiasta (Former Telecom Finland’s mobile communications network unit), Vol. 4, TELE Matkaviestinverkot. Turpeinen, Oiva (1996), Yhdistämme, Vol. 1–2, Helsinki: Edita.
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4. Innovation and absorptive capability in the traditional industries: The case of the Finnish wood products industry* Christopher Palmberg 4.1
INTRODUCTION
The exaggerated fixation on a narrowly defined set of so-called high-tech industries, both in empirical research and in policy discussion, undeservedly takes attention away from the more traditional and less R&D-intensive industries that still constitute a major sector in most industrialized countries. Finland is an interesting country in this respect, since the industrial structure underwent a rather radical transformation in the 1990s, mainly due to the emergence of diversified electronics, as well as ICT-related, industries. In statistics produced by the OECD, this transformation is reflected in the doubling of Finland’s share of total exports of high-tech products during the same period (OECD 1999). Despite this indisputably positive trend, there is more to it once we get behind the data. In particular, the role of one firm – namely the role of Nokia – in this transformation is striking. At the turn of the century, Nokia accounted for close to one third of the total R&D spending, as well as roughly one fourth of the total Finnish exports (Ali-Yrkkö et al. 2000; Ali-Yrkkö and Hermans 2002). Furthermore, when looking at the contribution of different industries to the total volume of production in the manufacturing sector, it is clear that Finland still to a significant extent relies on the more traditional industries, such as the forestry- and metals-based industries, despite the emergence of the electronics and ICT-related industries (Figure 4.1). Thus, the further fostering of the high-tech industries is not the only issue of concern in the Finnish context. The renewal of the traditional less R&D-intensive industries, and an understanding of the conditions and processes that support this renewal, are equally important. This chapter relates to a larger research project on the characteristics of innovation and industrial renewal in the traditional industries in Finland (see Palmberg 2001). The purpose of this chapter is to focus the discussion of the 65
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100 90 80 70 60 % 50 40 30 20 10 0
Electronics Chemicals, glass, ceramics Machinery, equipment Metals, metal products Foodstuffs Forestry-based Textiles, clothing Other 1995
1997
1999
2001
Figure 4.1 Contribution of different industries to the volume of production of the Finnish manufacturing sector 1995–2001 (ETLA database) renewal of traditional industries on the concept of absorptive capability, as exemplified through firm-level case studies drawn from the wood products industry. Absorptive capability is commonly considered as an important byproduct of R&D. It might be defined as ‘firms’ ability to recognise the value of new, external knowledge, assimilate it, and apply it to commercial aims’ (Cohen and Levinthal 1990, 128). Thus, absorptive capability also contributes to the renewal of industries by enabling firms to turn knowledge into innovations, as the sources of firm performance and expansion. The interest of this chapter in this concept stems from the fact that absorptive capability appears to be especially important in the traditional industries, since such industries typically assimilate and apply knowledge originating from upstream high-tech industries (Orsili 2001; Pavitt 1984). Yet, the traditional industries are typically characterized by lower levels of dedication to R&D, even though there are numerous examples of firms that apply advanced technologies and innovate persistently (Karnoe et al., 1999; Laestadius 1996; Maskell 1996).1 In this chapter I argue that the conventional understanding of absorptive capability has to be broadened in the context of the traditional less R&D-intensive industries, for the advancement of a better understanding of innovation and industrial renewal, as well as the conditions and processes supporting them. The chapter is structured as follows. In Section 4.2 I discuss the concept of absorptive capability and various previous empirical contributions that explicitly attempt to broaden the concept in various dimensions. In Section 4.3 I briefly
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discuss the characteristics of the forestry-based industries, as well as the Finnish wood products therein, before proceeding to a presentation of the firm-level case studies. Section 4.4 concludes by analysing the case studies with reference to the previous theoretical and conceptual discussion, while Section 4.5 provides policy implications that might be drawn from the findings.
4.2
THE MANY FACES OF ABSORPTIVE CAPABILITY – A CONCEPTUAL DISCUSSION AND REVIEW OF PREVIOUS RESEARCH
The point of departure taken by Cohen and Levinthal (1990) is the fact that external sources of knowledge and related opportunities are critical to an innovation process, whatever the organizational level at which the innovating unit is defined. Thus, one might, in principle, identify absorptive capabilities at the level of entire nations (the case of Japan is an often cited example, see for instance Freeman 1987), industries and networks (Eliasson 1995, 1999; Laestadius 1998), or firms and their functional units (Bosch et al., 1999; Pennings and Harianto 1992). Nonetheless, the focus of Cohen and Levinthal (1990) is on the firm level. Drawing on the observation of the cumulative nature of learning implies that their second point of departure is that absorptive capability is largely a function of the prior knowledge base of the firm. Moreover, the developing of absorptive capability is considered a by-product of investments in R&D. In developing their theoretical model, Cohen and Levinthal (1990) note that firms’ incentives to invest in R&D for developing their absorptive capabilities depend on two factors. The first factor is the necessary quantity of external knowledge to be assimilated and exploited for commercial ends. This quantity depends on the general level of technological opportunities, or the richness of the scientific and technological knowledge base that firms draw upon in developing particular innovations (see Klevorick et al. 1995 for a discussion on the nature of technological opportunities). The second factor is the ease of learning. The ease of learning depends on the cost of absorption of the relevant knowledge with direct feedback on the amount of R&D required to develop absorptive capability. Cohen and Levinthal (1990) dissect the ease of learning into four underlying dimensions of the nature of the scientific and technological knowledge that firms seek to assimilate and exploit. The first dimension is the complexity and targeted nature of knowledge. When external knowledge is less targeted and more complex, with respect to the firm’s particular needs, R&D-related absorptive capability becomes more important, and vice versa. The second dimension captures the degree of cumu-
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lativeness of the external knowledge, implying that fields characterized by discontinuous scientific and technological change induce the development of R&D-related absorptive capability, while greater continuity diminishes it. The third dimension is the pace of scientific and technological developments, suggesting that a faster pace of knowledge generation makes R&D-related absorptive capability more important. Finally, the fourth underlying dimension for the ease of learning is the degree to which knowledge is implicit or tacit rather than explicit or codified, and thus increases the incentives to develop R&D-related absorptive capability. In this context, Cohen and Levinthal (1990) draw on the discussion of tacit knowledge in Nelson and Winter (1982). The concept of absorptive capability opens up a discussion on the dual role played by R&D, both for the sources of innovation and the capability of firms to recognize, assimilate and apply related external knowledge. This discussion is important especially in the traditional industries, where firms typically are considered to largely rely on the absorption of embodied and disembodied technology originating from collaboration with upstream suppliers of machinery and equipment (Orsili 2001; Pavitt 1984). Nonetheless, the equating of R&D with absorptive capability by Cohen and Levinthal (1990) is apt to bias against industries, such as the wood products industry studied in this chapter, where firms might be persistent innovators and users of external knowledge despite their lower R&D-intensities. Thus, the purpose of this chapter, to go beyond the R&D-intensity of firms in understanding the nature and organization of innovation and absorptive capability, justifies a broader review of the extant literature. In this context, Garud and Nayyar (1994) propose that a firm’s ability to exploit external technologies is not sufficient to sustain innovation in the longer run due to the fact that external knowledge also tends to become available to other firms as time passes. In contrast, knowledge related to in-house technologies is not widely accessible, thereby forming a more long-lasting basis for competitiveness. Exploiting available in-house technologies requires the transfer and continuous reactivation of technology over time in response to changes in the environment of firms. This ability is what Garud and Nayyar (ibid.) label transformative capability. They propose that a viable distinction can be made between absorptive capability, which captures the ability to recognize, assimilate and apply external technological opportunities, and transformative capability, which captures the ability to recognize and exploit technological opportunities created inside a firm. The emphasis on the transformation of in-house technologies comes conceptually very close to a range of other studies that also identify differences in the capability to create entirely new knowledge through R&D, and the capability to recombine existing knowledge and technologies in novel ways. Schumpeter, for one, included new combinations in his definition of innovation (Schumpeter
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1912). More recently, Henderson and Clark (1990) argue that innovations are typically constituted of a number of different components, related technologies and knowledge. Innovation can concern the components themselves, but might also concern the way that the different components are linked together. They coin these types of innovations as architectural. They involve architectural capabilities to combine available components, related technologies and knowledge in new ways. Based on a case study of an anchor chain producer in Sweden, Laestadius (1996) goes further by arguing that the capability to introduce new combinations of available technologies involves quite different types of knowledge compared to that typically captured in the R&D accounts of firms. This type of knowledge is often tacit and involves solving practical engineering problems amongst workers, technicians and engineers on the shop floor. Laestadius (ibid.) suggests that this type of knowledge can support the absorption of external scientific and technological knowledge, for example through collaboration with universities or suppliers of machinery and equipment. One important question in this context concerns the conditions that enable the transfer of knowledge within networks characterized by the unequal distribution of absorptive capability. Important contributions here are Allen (1977) and Tushman and Katz (1980), who touched on the issue by emphasizing the role of ‘gatekeepers’ at the interface of the firm and its environment. The point made is that such gatekeepers are able to reduce the possible mismatch in language and cognitive orientation amongst collaborators and thus contribute to absorptive capability. In summation, these insights suggest that the development of absorptive capability should not be merely viewed and analysed at the firm level. Rather, absorptive capability might also be built collectively through collaboration spanning both industrial and institutional boundaries. They also point towards a ‘collective’ component of absorptive capability, which might be especially important in the less R&D-intensive industries as exemplified here by wood products and the glue-lam timber industry.
4.3
THE CASE OF WOOD PRODUCTS AND THE GLUE-LAM TIMBER INDUSTRY
4.3.1
The Forestry Cluster and Characteristics of the Wood Products Industry
Altogether forestry-based industries accounted in 1999 for roughly 30 per cent of total Finnish industrial production, and contributed some 10 per cent to GDP (Finnish Forest Industry Federation 2000). The dominating role of the pulp and paper industry is clear from the fact that close to half of the value of exports of
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forestry-based industries in Finland originates from various finished paper grades, while wood products account for roughly one fifth. Moreover, the lion’s share of R&D, production and exports originates from a few multinational pulp and paper conglomerates. Nonetheless, the lower R&D-intensity of the wood products industry conceals a relatively diversified industry in terms of product segments and related degree of value added of the end products (Figure 4.2). 3% 18%
46%
19%
Sawing Panels Joinery Furniture Others
14% Source:
www.forestindustries.fi
Figure 4.2 The product segments of the Finnish wood products industry in 2000 According to the figure, bulk-sawn timber accounts for the largest share of total production of the Finnish wood products industry (46 per cent of total production). Sawn timber mainly consists of sawn logs graded according to size and quality, and then dried and debarked for end-use. In the wood panel industry (14 per cent of total production), sawn logs are peeled or chipped down to the core of the log. The thin sheets of veneer or the wood chips are then treated in various ways, dried, graded into different quality categories, and finally glued together to form plywood, particleboard or fibreboard. In the joinery industry (19 percent of total production), the products range from jointed sawn or panel-wood timber to complete building systems, such as wooden roof structures or log houses. The furniture industry is yet another segment of relative importance in Finland (18 per cent of total production), which lies closer to the end-consumers (Finnish Forest Industry Federation 2000). By and large, the joinery and furniture industries share the highest level of value added, compared especially to the sawing and panels industries. Even though the different segments share obvious synergies downstream in the valueadded chain, the selection of raw materials, capital investments and related
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barriers to entry determine within which segments firms can viably position themselves. Of these segments, the most dynamic part of the industry consists of medium-sized firms and some larger ones, involved in sawn timber, wood panels and joinery to a certain extent. These firms are also most actively connected to the research infrastructure due to the higher value added of the related products. The remaining large share of small firms is more focused on specific niches, primarily within sawn products (specific wood qualities). Despite product segmentation, the primary user of wood products is the construction industry. Recently, the level of public R&D funding has risen significantly, relatively speaking. This rise in public funding has mostly been channelled through four recent research programmes commissioned by the National Technology Agency of Finland (Tekes) and including firms and various research groups from the Technical Research Centre of Finland (VTT) and the technical universities. Furthermore, the research infrastructure has gradually been consolidated through the establishment of the Otawood group in 1995. Otawood is a research consortium involving research groups from the main research organizations and technical universities involved in structural engineering, building physics, wood technology and construction (Paajanen 1998). An explicit strategy underlying these initiatives is to increase the value added of the end-products through innovation, as well as to aim for turn-key deliveries of complete building systems, such as wooden houses and standardized construction solutions (Finnish Forest Industries Federation 1999). While the basic technologies and techniques in use in the wood products industry have been around for quite some time, new opportunities mainly emerge related to the use of new ICT-based solutions in timber handling and logistics, the increasing applicability of chemical engineering to the structural analysis and modification of the durability of wood, as well as the new combination of composites, polymers and wood for use especially in construction (Paajanen 1998). Another important source of innovations is regulatory change and standardization in connection with the use of wood in construction that open up new markets. Concrete and steel have traditionally been the dominating raw materials in the construction industry. The glue-lam timber industry, the focus of this chapter, is a common name given to wood products made from the gluing together of softwood veneer or solid timber to form long-span supporting beams for architecturally demanding structures. The end products of the glue-lam industry thus belong to the joinery segment in Figure 4.2 with applications in the construction industry. The core capabilities involved in the development of glue-lam relate to gluing and jointing techniques that homogenize the wood, enhancing its durability and fire resistance, and enable the production of beams with accurate dimensions. The glue-lam timber industry is constituted of a handful of firms, of which the two
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case study firms are examples of successful and progressive ones, despite differences in terms of their size, ownership structure and scope of activities. They are thereby interesting cases for the purpose of this chapter.2 4.3.2
The Development of Glue-lam Timber Bridges
The first case study firm, Vierumäen Teollisuus Oy, is a relatively self-sufficient wood products integrate involved in most activities along the value-added chain, from raw material handling to the conversion of sawn timber into semi-finished solid wood glue-lam components for the construction industry. Treated and precision-cut sawn timber accounts for roughly 60 per cent of total sales. Wood products processed to various degrees of value added make up the remainder. The main processed wood products include glue-lam beams and bridges, and various impregnated products such as poles, noise barriers, fence posts and landscaping fences. More than 50 per cent of the total output is exported. In 1999, the firm employed 420 people at four operating locations, all situated in Finland (Annual Report 2000). The firm became involved in impregnated wood products in the mid-1960s. A few years later, the first jointing techniques were developed. Through these developments, the product palette gradually diversified towards various impregnated wood products, such as telephone and power poles, bridges and beam structures with higher value added. In the late 1970s and early 1980s, the sawmill operations expanded further through the founding of two new sawmills as well as new wood-drying facilities. In the 1990s modernization continued with the aim of increasing productivity in bulk-sawn timber and setting aside more resources for processed wood products. Altogether the firm had a sawing capacity of roughly 550 000m3 in 1998 compared to 120 000m3 in 1990. Sawn timber is increasingly used for various glue-lam wood products, in particular as beam structures for public buildings or bridges for rural roads and overpasses, as well as smaller-scale impregnated wood products (Fyhr 1999). The investments in machinery, modernization and the expansion of activities through the founding of new sawmills are paralleled by a gradual development of capabilities within the core areas of the firm, namely the sourcing of wood, impregnation, glue-laminating and jointing techniques. The development of these capabilities has depended critically on the development of production methods through in-house processes of learning by using and doing, combined with investments in new sawing machinery. The related process innovativeness enabled the sawing of wood in new dimensions, which in turn broadened the product range and customer base. These characteristics of innovation and related capability building are best illustrated through development work related to wooden bridges, a product group that became increasingly important to the firm in the 1990s.
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The technological opportunities enabling the development of wooden bridges were related to the modernization of sawing machinery and the development of jointing and impregnation techniques within the firm. This enabled the sawing and sorting of wood by length and grade, as well as the customized joining and impregnation of glue-laminated wood to fit specific bridge designs. However, the expansion of the business area was limited by the dominant use of concrete and steel as building materials, as well as the lack of construction standards stipulating durability and compatibility parameters for wooden bridges, and had to await new market openings. These emerged in the late 1980s, as the use of wood in construction received increasing attention through various promotional schemes and publicly funded research consortia initiated in Finland at the time. One such consortium consisted of representatives of the glue-lam and wood panel industry, the laboratory of bridge engineering at the Helsinki University of Technology, the Finnish Wood Research Centre and the Finnish National Road Administration. The aim of this consortium was to investigate new techniques for developing wooden bridges of longer spans, which could compete with the traditional construction materials, and was subsequently expanded to the Nordic level through funding from the Nordic Industrial Fund and Tekes. Apart from exploratory research undertaken during 1994–98, with the aim of surveying the state of the art in wooden bridge building around the world, the consortium in Finland was also activated around specific bridge-building projects. The consortium developed techniques for the construction of so-called wood-concrete composite bridges and X-connector arch bridges, which provided a cost-effective advantage over previous wooden bridge designs. These projects have also involved construction contractors and designers. The typical division of labour within R&D in these projects has been one in which the procurers, designers and the firm produced a basic design. Thereafter, the compatibility of the design and prototype with prevailing construction norms and standards is tested and accepted by the Finnish National Road Administration, in collaboration with the research groups at the technical universities and research organizations. The participation of Vierumäen Teollisuus in this division of labour depended to a significant degree on a couple of engineers who were able to translate theoretical models used to calculate the durability values of different constructions into practical bridge-building techniques, thus incorporating construction standards into product development. These insights, in turn, have fed back on the needs of the firm to source specific types of wood timber, the fine-tuning of sawing, glue-lamination and jointing techniques, and have thereby added to the cumulative stock of experience in these techniques. Altogether the firm has delivered 30–60 bridges per year, and smaller pedestrian bridges are also exported. The work within the research consortium culminated in the
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construction of the largest wooden bridge in the world, with an arch-span of 182 meters, a significant innovation in the context of wooden building design (Nordic Timber Council 1999). 4.3.3
The Development of Laminated Veneer Lumber
The second case study firm, Finnforest Oy, is a much larger wood product integrate, covering the whole value-added chain of wood processing within various segments of the sawn timber and the wood panel industry. Although relatively autonomous, the activities of the firm are organized under the conglomerate umbrella of Metsäliitto Oy, presently the third largest forest industry company in Finland. In 2000 the firm employed about 4000 people at 25 production units, the majority of these situated in Finland. The turnover rose throughout the 1990s, mainly due to the profitability of the sawn timber, DIY, and LVL (laminated veneer lumber) businesses. Over 80 per cent of the total turnover is exported, mainly to Europe. (Annual Report 2000; Finnish Federation of the Forest Industries 2000) Laminated veneer lumber is a particularly expanding product area. LVL is made by gluing together peeled softwood veneer to form solid beams and boards for different construction applications, including public and residential buildings, large hall-type structures, warehouses and agricultural buildings, as well as recently for concert halls and wooden bridges. LVL is durable, lightweight and precision-machined, and thus superior to traditional sawn timber. (Mäkynen 1999; Annual Report 2000) The strong position that the firm holds in Europe with LVL is a result of continuous in-house development in the underlying structures of the material, in jointing and glue-lam techniques, and in the visual appearance of the product. These incremental developments and related innovations have, in turn, expanded the usage of LVL towards a range of new and specific applications in construction. Another important source, inducing innovation, has been related to the standardization of LVL to different construction regulations and standards, as well as market niches. These efforts have been reflected in extensive networking with research organizations, universities, retailers and customers both in Finland and abroad. (Kairi 1999) The history of LVL and the associated business area dates back to the early 1970s, when the conglomerate host actively looked for new processed products to increase the value added to timber in the face of rising stumpage prices and increasing price competition. The idea behind LVL as such was not new. In the US, the Forest Products Laboratory had published articles on related techniques, and production of this type of product had already commenced a few years earlier. These experiences and publications from the US led to the initiation of a research project at the corporate R&D unit in collaboration with the forest product laboratories at VTT and Helsinki University of Technology.
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During the early phases of development the main concerns related to standardization and safety regulations regarding the durability of the material. LVL was a completely new concept in construction and one of the first processed wooden building components on the Finnish market. Meanwhile, development work related to process technology was initiated, and the first pilot production line was set up in 1975. In the same year the first product approvals were granted for marketing the product in Finland. Close collaboration with both VTT and Helsinki University of Technology continued throughout the 1970s and 1980s, and resulted in several dissertations and publications. During the pilot phase the LVL concept was revised several times. A production method that allowed for continuous sawing and glue-lamination was developed and patented, and this made the product more suitable for specific applications in construction. The raw material was also changed from birch to conifer, which has higher durability values. (Rakennustaito 1995) More emphasis was given to marketing and exports, since the product had to pass through various tests and modifications for acceptance as a new construction material in various export markets. Technologically, the further in-house development of LVL as a business area has primarily related to investments in machinery and the fine-tuning and adjustment of production methods and related machinery in order to broaden the application areas from simple beam structures towards more complex building components and systems. By 1999, the LVL production capacity had risen to approximately 100 000 m3 compared to 10 000m3 in 1985. In 2001, the fourth production line added some 70 000m3 in capacity. Meanwhile the share of exports in total turnover rose from 20 per cent to 80 per cent during the same period. (Kairi 1999, Annual Report 2000) Alongside investments in machinery, the development and adjustment of production methods and the broadening of application areas, new collaborative partners have entered the network. During the 1990s, LVL evolved in a succession of phases whereby its visual appearance was enhanced. To a large extent, these incremental innovations occurred in close collaboration with research groups at Helsinki University of Technology and VTT in connection with the Otawood research consortium. This collaboration has largely evolved around the same key people at the firm, involved with LVL right from the start, due to their role in translating research into applications, and vice versa. The firm has also participated in using LVL in the construction of glue-lam bridges. Recently the focus has increasingly been on developing turnkey building systems and solutions for customers within the construction industry (annual report 2000). The strong position of LVL on European markets stems largely from the fact that the firm has managed to develop a technological advantage in terms of process technology and the high degree of finish on the product, which in turn has broadened the applicability of LVL to various construction sites.
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Nonetheless, the fact that LVL represents a new concept and building material, as well as a competitor to traditional materials, such as concrete and steel, has implied that each new market opening has been preceded by an extensive partnership with various foreign research organizations and retailers. Hence, an extensive repertoire of standardized and customized applications of LVL has been developed to cater to various national construction standards, regulations and practices.
4.4 4.4.1
THE NATURE OF INNOVATION AND ABSORPTIVE CAPABILITY – A CONCLUDING DISCUSSION Technological Opportunities and Sources of Innovation
Despite the advantages of case studies in highlighting processes and conditions supporting innovation and industrial renewal, there is a problem of generalization (Yin 1994). In this chapter the subsequent conclusions thus relate to commonalities arising from both case studies, as well as the general insights of the wood products industry based on the interviews and available literature. Even though generalization thereby is enhanced, it should nonetheless be noted that the case studies are ‘snapshots’ of innovation within two quite different types of firms in a broader industry. With these caveats in mind, it seems safe to conclude that the glue-lam timber industry appears to be characterized by relatively depleted technological opportunities as the basic timber-gluing and -jointing techniques have been around for quite some time, as well as by the price-competitive nature of the markets. Developments in the sciences and technologies, which firms draw upon during innovation, are slow-paced and highly cumulative. The assimilation and application of the related external knowledge is targeted to the development and fine-tuning of production methods and process technology in order to raise productivity. Hence, and in line with the model proposed by Cohen and Levinthal (1990), the firms indeed appear to have fewer incentives to become engaged in R&D during innovation and absorptive capability building. Nonetheless, the continuous development of sawing, gluing and jointing techniques has added new characteristics to the end products, increasing their value added, use and novelty in the market. Moreover, the competitive nature of the markets has induced a great deal of ingenuity on the part of firms with respect to the capabilities to run and continuously readjust their machinery and equipment. These capabilities are largely related to processes of learning by doing and using within the firms, as discussed in greater detail by Rosenberg (1982). They appear to compensate for depleted technological opportunities in
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the external environment of the firms (compare to Laestadius (1998) and his discussion of knowledge creation in the pulp and paper industry). Furthermore, these learning processes are relatively unsystematic and routine-like, rather than strictly goal-oriented. They are clearly not registered as R&D expenditures in the first place, as these are defined in the OECD Frascati Manual (OECD 1993). Even though depleted technological opportunities might be an overarching feature of the wood products industry as a whole, the cases clearly also highlight ‘pockets’ of opportunities related to development in the sciences and technologies external to the firms. The firms have been engaged in research programmes and collaboration with universities and research organizations in order to gain access to this knowledge. These opportunities relate to the structural engineering of wood, and the combining of wood with polymer, metals and other materials. As Rosenberg et al. (1994) also note, wood is, in fact, a very complex and demanding raw material in terms of its chemical structure, whereby basic research comes to bear on problems in process and product development. A further issue arising in connection with the case studies is the role played by regulations and standards. The firms need to recognize, assimilate and apply various construction standards and regulations regarding the durability, fire resistance, and stress tolerance of wooden construction in the development of product innovations. Accordingly, regulations and standards add to the complexity of the learning environments in which the firms develop capabilities and innovate. They also promote collaboration with regulators, procurers, and engineering houses, as well as end-customers. 4.4.2
The Nature of Absorptive Capability
Based on the discussion above, there thus appear to be at least two further dimensions to absorptive capability, in addition to those captured in the model proposed by Cohen and Levinthal (1990), that matter for the renewal of the firms and industry studied in this chapter. First of all, there seems to be a shift in the attention of firms given to assimilating external knowledge towards exploiting knowledge already residing within the firms. Above, the close association between process and product innovations was discussed from the viewpoint of learning by doing and using. With reference to Cohen and Levinthal (ibid.), these learning processes compensate for the lesser importance of R&D-related absorptive capability, and contribute to the capability of the firms to innovate persistently, despite depleted technological opportunities. These capabilities might be considered as the efficiency factor of absorptive capability, giving leverage to external knowledge as it is applied in the context of lower levels of technological opportunities. They also closely resemble what
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Garud and Nayyar (1994) call transformative capabilities, or the capabilities of firms to transfer and continuously reactivate in-house technologies over time. The case studies give some nice illustrations of the relationships between absorptive and transformative capabilities. The purchase of machinery and equipment from other related industries is an important part of the assimilation of external knowledge. Nonetheless, the capabilities to actually integrate and continuously readjust this machinery and equipment in anticipation of changes in the external environment of the firm, are paramount to incremental innovation and long-term competitiveness. This concerns the use of different sawing, gluing and jointing techniques to achieve different applications, ranging from simple glue-lam beams, to architecturally complex roof structures, complete buildings and bridges with greater span-width. As suggested previously, these capabilities also closely resemble what Henderson and Clark (1990) call architectural capabilities to recombine existing knowledge in novel and creative, albeit sometimes very complex and demanding ways, even though they fall outside the definition of R&D. Hence, greater attention should be given to the sectoral specificity of absorptive capability. The results arising from the case studies dealt with in this chapter suggest that the relative importance of absorptive capability and the transformative capability to innovate might vary according to the features of the industries that one looks at. Moreover, striking a balance between developing these two supposedly distinct types of capabilities might represent a profound challenge in industries where there are few incentives to set aside resources for long-term R&D. 4.4.3
The Organization of Absorptive Capability
Turning now to the second dimension of absorptive capability, it seems to be poorly captured by the model of Cohen and Levinthal (1990). This concerns the organization of absorptive capability, and the collective component of absorptive capability embedded in the collaborative networks that the firms are engaged in. In particular, the firms are confronted with a range of challenges relating to the integration of machinery and equipment into their production routines, to the combination of different vintages of technologies during product development, as well as to the mastering of regulations and standards. In the case studies, these show up in collaboration with universities and research organizations aimed at gaining access to technological opportunities, as well as in collaboration with suppliers, procurers, regulators and customers aimed at overcoming bottlenecks in production, choosing the optimal raw material for different end-products, or innovating in line with regulations and standards. Collaboration enables the firms to dip into external knowledge without having to develop R&D-related absorptive capability of their own. This collective component of absorptive capability arises due to a division of labour during
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collaboration. The sourcing of the raw material, the development and adjustment of production methods, and the scaling of prototype production to an industrial scale are core capabilities of the firms. The more analytical R&D-related activities are typically undertaken jointly with research groups at the universities and research organizations. These kinds of activities concern the basic understanding of the chemical structure of wood, its durability and response to chemical and biological treatment. This division of labour during collaboration suggests that a similar knowledge base among the partners is not a necessary prerequisite for developing ‘collective’ absorptive capability. Rather, learning by doing and using also contributes to firms’ abilities to participate in this type of collaboration for the development of absorptive capability, even though it is largely non-R&Drelated and occurs in areas close to the existing knowledge base. More significantly, however, it would seem that the firms have managed to ‘outsource’ some parts of their absorptive capability, especially to research groups at the universities and research organizations. The cases provide ample evidence underlining the important role of the public research infrastructure, as well as research programmes. In this context, the role of technological gatekeepers has been crucial to transferring knowledge across organizational boundaries. Allen (1977) characterizes a technological gatekeeper as a key person within a firm with the ability to translate and communicate relevant external scientific or technological knowledge throughout the firm. Typically gatekeepers are well versed in the relevant literature and recent developments, have a supervisory role vis-à-vis product development, as well as a long employment history with extensive contacts within the firm. Thus, they are able to reduce the possible mismatch in language and cognitive orientation within the type of networks described above (Tushman and Katz 1980). The gate-keeping role of the individuals in the case studies was to communicate their experience-based knowledge of the practical properties and application of glue-lam in various architecturally demanding structures to scientists involved in research on the chemical structure and durability of different glue-lam end-products. Likewise, they have contributed to bridging the ‘cognitive gap’ between traditional construction heuristics, based on the use of steel and cement, and new ones, based also on the use of wood for complex constructions, such as high-rise houses or heavy traffic bridges.
4.5
POLICY IMPLICATIONS
Despite the problems in generalizing the case studies, it seems fair to conclude that a starting point for a policy discussion is that traditional industries, such as
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the wood products industry, are not necessarily doomed to stagnating demand and non-renewal, despite the fact that depleted technological opportunities imply lower pay-offs from R&D. Quite the contrary, there are significant niches of technological opportunities and expansion that should be nurtured further, of which the glue-lam timber industry discussed in this chapter might serve as one example. An especially important issue seems to be related to the diffusion of new emerging technologies as a means of transforming and renewing existing areas of strength in traditional industries. This would suggest that the focus of policy should be on network-facilitating policies that connect engineering communities from different industries around different vintages of technologies (highand low-tech combined). Nonetheless, the case studies also give some good illustrations of the potential problems that the policy-maker might face during the set-up of such collaborative projects. Reference can be made to the confrontation of paradigms, or heuristics, that is evident in the case of the integration of science-based communities and explorative research with the more experience-based engineering heuristics and exploitation that appears to prevail in the wood products industry (for a discussion of paradigms and heuristics, see Dosi 1988). Apart from the importance that both public R&D subsidies and research and technology programmes can play in industries such as the one studied here, it seems clear that general framework conditions also matter for renewal, even if they sometimes remain outside the sphere of influence of innovation policy. Specifically, the case studies point towards the importance of a range of other activities complementary to R&D subsidy and technology programmes. Thus, there appears to be a particularly strong case here for the co-ordination of different types of policies in the overall policy framework. One problem in this context appears to be a shortage of engineers with the necessary skills. Therefore educational policies have a role to play in catering to the peculiar demand that many firms seemingly have, for example in the wood products industry. The role of regional initiatives, polytechnics and vocational schools is probably especially important since many smaller firms and sawmills are deeply rooted in their local milieu, not least due to their reliance on locally sourced raw materials and their dependence on minimizing transportation costs. A related problem concerns the sustainability of the research infrastructure. While a certain degree of crowding-out of the traditional sciences from the curriculum of universities might be warranted due to the evident growth in the importance of others, it would seem to be of great importance to secure a necessary level of basic research. This is essential since firms rely on collaboration to access the more explorative type of research that is undertaken at the universities due to their lesser incentives to become engaged
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in systematic in-house R&D activities. Thus the erosion of the research infrastructure would also seriously undermine the absorptive capability of the firms. Finally, standardization and legislation is another area where much could be done to foster innovation. Clearly, the wood products industry would benefit greatly from the further development of national construction standards, as well as the creation of a pan-European wooden construction standard. While standardization and legislative change is a possible and viable policy measure in the national context, international efforts are more problematic from the small country perspective. The creation of European standards in the field of wooden constructions is a case in point, due to fragmented markets, competition, as well as tendencies towards protectionism in some countries.
NOTES * This chapter builds on Palmberg (2001). Financing from the Finnish National Fund for Research and Development (Sitra) is kindly acknowledged. 1. The definition of R&D used in this paper relies on the OECD’s Frascati Manual (OECD 1993). In this manual R&D is defined as ‘creative work undertaken on a systematic basis in order to increase the stock of knowledge of man, culture and society, and the use of this stock of knowledge to devise new application’. The main point in this context is the focus of this definition on quantifiable monetary expenditures on systematic and goal-oriented activities, to the neglect of activities of a more unsystematic nature that nonetheless contribute to innovation (see Laestadius (1996) for a lengthier discussion of the pros and cons of the Frascati Manual). 2. The selection of case study firms relied on interviews with experts at VTT, the National Technology Agency, as well as the Finnish Forest Industry Federation. The case studies rely on 14 semi-structured interviews covering representatives of the firms, universities, and other relevant actors in the field, complementing publicly available material. The case study descriptions have been circulated amongst the firms to secure consistency. For a lengthier methodological discussion, see Palmberg (2001).
REFERENCES Ali-Yrkkö, Jyrki and Raine Hermans (2002), Nokia in the Finnish Innovation System, ETLA Discussion Paper no. 811. Allen, Thomas (1977), Managing the Flow of Technology, Cambridge, MA: MIT Press. Bosch, Frans, Henk Volberda and Michiel de Boer (1999), ‘Coevolution of Firm Absorptive Capacity and Knowledge Environment: Organizational Forms and Combinative Capabilities’, Organization Science, 10 (5) 551–68. Cohen, Wesley and David Levinthal (1990), ‘Absorptive Capacity: A New Perspective on Learning and Innovation’, Administrative Science Quarterly, 35 (1) 128–52. Dosi, Giovanni (1988), ‘The Nature of the Innovation Process’, in Giovanni Dosi, Christopher Freeman, Richard Nelson, Gerald Silverberg and Luc Soete (eds) Technical Change and Economic Theory, London: Pinter Publishers. Eliasson, Gunnar (1995), Teknologigeneratorer eller nationellt prestigeprojekt? Exemplet svensk flygindustri, Stockholm: University Press.
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Eliasson, Gunnar (1999), Undervattensteknologi i industriell tillämpning – projektet Viking som nordisk industriell kompetensgenerator, Forskningsrapport TRITA-IEOR 1999:12. Finnish Forest Industries Federation (1999), Visio 2010, Askonpaino: Meridian X Oy. Finnish Forest Industries Federation (2000), Key to the Finnish Forest Industry, Helsinki. Fyhr, Pekka (1999), ‘Vierumäen Teollisuus rakentaa Heinolaan Pohjoismaiden suurimman liimapuutehtaan’, Puumies, 10, 9. Garud, Rahud and Praveen Nayyar (1994), ‘Transformative Capacity: Continual Structuring by Intemporal Technology Transfer’, Strategic Management Journal, 15, 365–85. Henderson, Rebecca and Kim Clark (1990), ‘Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms’, Administrative Science Quarterly, 35, 9–30. Henttinen, Annastiina and Anneli Havén (1996), Laivalaudasta liimapuuhun, Lahti: Markprint Oy. Kairi, Matti (1999), Kertopuun tarina. Personal notes. Karnoe, Peter, Peer Kristensen and Poul Andersen (eds) (1999), Mobilizing Resources and Generating Competencies, Copenhagen: Copenhagen Business School Press. Klevorick, Alvin, Richard Levin, Richard Nelson and Sidney Winter (1995), ‘On the Sources and Interindustry Differences in Technological Opportunities’, Research Policy, 24, 185–205. Laestadius, Staffan (1994), Ramnäs Ankarkätting AB – världsledande tillverkare av avancerad lågteknologi, Royal Institute of Technology, TRITA-IEO R 1994:2. Laestadius, Staffan (1996), Är Sverige lågteknologiskt? – reflektioner kring kunskapsbildning och kompetens inom industriell verksamhet, Forskningsrapport TRITA-IEO R 1996: 2, KTH, Stockholm. Laestadius, Staffan (1998), ‘Technology level, knowledge formation and industrial competence in paper manufacturing’, in G. Eliasson and C. Green (eds), Microfoundations of Economic Growth – A Schumpeterian Perspective, Ann Arbor: University of Michigan Press. Maskell, Peter (ed.) (1998), Competitiveness, Localised Learning and Regional Development: Specialisation and Prosperity in Small Open Economies, London: Routledge. Massau, Ali (1993), Advantage Finland – Sawmill Industry, ETLA Discussion papers No. 442. Mäkynen, Jarkko (1999), ‘Vaneria kellon ympäri – yhä puhtaimmissa olosuhteissa’, Puumies, 6, 9–30. Nelson, Richard and Sidney Winter (1982), An Evolutionary Theory of Economic Change, Harvard, CT: Harvard University Press. Nordic Timber Council (1999), Timber Bridges – A Presentation of 22 Nordic Timber Bridges. OECD (1993), Frascati Manual, Paris: OECD. OECD (1999), Benchmarking Knowledge-based Economies, Paris: OECD. Orsili, Marsili (2001), The Anatomy and Evolution of Industries – Technological Change and Industrial Dynamics, Cheltenham: Edward Elgar. Palmberg, Christopher (2001), Sectoral Patterns of Innovation and Competence Requirements – A Closer Look at Low-tech Industries, Sitra Reports Series 8, Helsinki: Sitra. Paajanen, T. (1998), ‘Mekaanisen metsäteollisuuden erityspiirteet toimialana’, Pnumarkkinapäivä, 13 (12).
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Pavitt, K. (1984), ‘Sectoral patterns of technical change – towards a taxonomy and theory’, Research Policy, 13 (6) 343–73. Pennings, J. and F. Harianto (1992), ‘Technological networking and innovation implementation’, Organization Science, 3, 356–82. Rakennustaito (1995), Kertopuutuotannosta yli 80% vientiin, Puumies, 9, 28–9. Rosenberg, Nathan (1982), Inside the Black Box: Technology and Economics, Cambridge: Cambridge University Press. Rosenberg, Nathan, Peter Ince, Kenneth Skog and Andrew Plantinga (1994), ‘Understanding the Adoption of New Technology in the Forest Products Industry’, in Nathan Rosenberg (ed.) Exploring the Black Box: Technology, Economics, and History, Cambridge: Cambridge University Press. Schumpeter, Joseph (1912), Capitalism, Socialism and Democracy, Harper & Brothers, New York: Harper Colophon Books, 1975. Tushman, Michael and Ralph Katz (1980), ‘External Communication and Project Performance: An Investigation into the Role of Gatekeepers’, Management Science, 26 (11), 107–85. Yin, Robert (1994), Case Study Research – Design and Methods, London: Sage.
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APPENDIX: R&D INTENSITY OF FINNISH INDUSTRIES (OECD 1999) R&D expenditure as a percentage of value added in 1990 and 1995 (the wood products industry in italics) Industries
1990
1995
Pharmaceuticals Radio, TV & communication equipment Electrical machinery Other transport equipment Professional goods Office & computing machinery Electrical apparatus Fabricated metal products Chemical products Non-electrical machinery Rubber & plastic products Machinery & equipment Chemicals excluding drugs Motor vehicles Non-metallic mineral products Non-ferrous metals Petroleum refineries & products Transport equipment Basic metal industries Metal products Iron & steel Foodstuffs Paper, paper products & printing Textiles, apparel & leather Wood products Shipbuilding & repairing
28% 26% 17% 8% 19% 9% 9% 8% 9% 6% 5% 6% 9% 4% 2% 5% 6% 4% 4% 2% 3% 3% 2% 1% 1% 2%
39% 35% 26% 21% 13% 13% 11% 11% 9% 7% 7% 7% 7% 5% 4% 4% 3% 3% 2% 2% 2% 2% 1% 1% 1% 1%
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5. Knowledge services in the Finnish innovation system Aija Leiponen 5.1
INTRODUCTION: KNOWLEDGE-INTENSIVE BUSINESS SERVICES IN THE DEVELOPMENT AND CIRCULATION OF KNOWLEDGE IN THE INNOVATION SYSTEM
This chapter examines the role of knowledge-intensive business services (KIBS) in the innovation system based on new data concerning Finnish business service firms. These services have become one of the key vectors of knowledge transfer in the system, and they are expected to perform as new engines of knowledge-based growth and innovation. Are these expectations realistic; can the KIBS sector deliver accordingly? This chapter explores how KIBS firms create new knowledge in the innovation system and how these firms influence their clients’ performance. Knowledge-intensive business services are a fascinating object of research also because their ‘products’ are information and competencies. These are the building blocks of the knowledge-based economy. Understanding how KIBS firms and industries operate will give us a ‘sneak preview’ into the strategies and issues emerging in the future as the knowledge intensity of the whole economy grows. Knowledge is a very special economic good because of its intangibility. We define knowledge here as consisting of codified information and tacit competencies. In contrast to information, the codified expression of competencies is frequently expensive if not altogether impossible. As a consequence, transferring knowledge from a business service provider to a client can take extended periods of time and require the client’s close co-operation and contribution, contrary to the situation in most tangible goods markets. The study of these kinds of knowledge transactions is only beginning but it is very promising, because it can illuminate collaborative innovation activities more generally. Innovation, like knowledge-intensive service transactions, depends often on collaboration among distinct organizational partners. 85
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Research on KIBS industries and firms has been growing in recent years. Miles’ work on the service economy and KIBS industries identified the main differences between service and manufacturing industries (Miles 1994; Miles et al. 1995). Other scholars have provided descriptive and conceptual analyses of KIBS (Gallouj 1997; Hauknes 1998; Sundbo 1997; Tordoir 1995). On the other hand, management and technical consultancies have been studied for some time (Hansen, Nohria and Tierney 1999; Mowery 1983). Similarly, professional services, such as legal and accounting services, have been investigated particularly in the sociology of professions (such as in Eliot Freidson’s work, 1998). An emerging perspective is to view KIBS, a subset of professional services, as an important element in systemic innovation (Hauknes ibid.). The current study contributes to this avenue of research by using one of the first cross-sectional datasets to analyse the effects of KIBS firms’ characteristics and client relationships on their innovation activities and performance. Innovation in services is a new area within the multidisciplinary field of innovation studies. Barras’ (1986; 1990) early work on innovation in financial services set the stage for more explicit and detailed analysis of different kinds of service industries. The new Community Innovation Survey data that have been collected in a number of European countries have enabled large-scale studies of service innovation, akin to the ones in which innovation scholars have been engaged concerning manufacturing industries. Using these data for Italian industries, Evangelista (2000) proposed that innovation activities in service and manufacturing industries have more commonalities than differences. In fact, variation within these two broad sectors appears to be larger than that across sectors. His results thus suggest that we do not need a whole new toolset to study innovation in service firms, although we may need to be sensitive to the special characteristics of services. KIBS firms both create new knowledge themselves and learn from their clients and other organizations. Knowledge obtained in these ways can be recombined into new service offerings. Knowledge is thus transferred in both directions within client relationships. This makes strategic and contractual considerations of managing and controlling knowledge in service relationships critical. This chapter examines, first, the innovation and knowledge management activities of KIBS firms themselves, and second, the nature of service firms’ creative interactions with their clients. The discussion is largely based on Leiponen (2001). Readers interested in more scholarly publications are also referred to Leiponen (2002; 2003; 2004). The aforementioned three studies provide more detailed information about the collection and characteristics of the survey dataset. The next section introduces the service and client strategies identified in the study. Section 5.3 describes the knowledge bases of business service firms using the Finnish survey data. KIBS firms’ innovation activities and relation-
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ships with clients are examined in Section 5.4. Finally, implications for innovation policies are elaborated in the last section.
5.2
INTERNAL AND EXTERNAL KNOWLEDGE CREATION IN BUSINESS SERVICES: RESEARCH APPROACH
This chapter examines knowledge creation and transfer by KIBS firms on three levels of study. The first level concerns innovation activities within the service firm itself. The second level explores the interaction between KIBS firms and their clients, with particular emphasis on service strategies and contractual arrangements. The discussion on these two levels that follows is based on a new survey dataset of 167 Finnish KIBS firms, complemented with some interview data (for a description of the survey data, see Leiponen 2001; 2004). The third level of analysis draws on five interviews with client firm managers concerning the nature and significance of co-operative service relationships with KIBS providers. These levels of analysis and data sources yield a multifaceted picture of the role of KIBS firms in the knowledge economy. 5.2.1
Service Firms’ Competitive Strategies
KIBS firms’ internal activities are approached from three closely related points of view. First, the most prominent service strategies identified are in terms of firms’ orientation towards either pure expert services or packaged service solutions. Service ‘packaging’, in other words some degree of conceptualization and standardization, facilitates the organization of knowledge in and transfer from the service-providing firm. Expert services, on the other hand, enable more intensive customization and client-specific problem-solving. Second, competitiveness strategies are characterized through survey questions that inquire whether the firm’s operations are primarily based on organizational, in other words collective (knowledge) resources, or whether skills and learning embedded in individual experts are more crucial for the firm’s success. The role of experts in the firm has far-reaching implications, among other things, for the firm’s growth potential. The third strategic dimension identified here is represented by the modes of learning employed by the company. Here, the polar strategies include, on the one hand, the combination of internal and external knowledge sources, and on the other hand, incremental and highly cumulative learning by doing. A combinatory strategy enables more radical innovations than local and incremental learning. These strategies are summarized in Table 5.1. The performance implications of these strategies are assessed through their
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effects on innovativeness, as reported in Section 5.4. The results obtained suggest that strategic choices with respect to services, competitiveness, and learning influence the firm’s direction and speed of evolution. Table 5.1
Service firms’ strategic choices
Service strategy
Competitiveness strategy
Learning strategy
Expert services
• Operating as outside expert in clients’ projects
Service solutions
• ‘Packaging’ of services • Service concepts
Individuals’ skills
• Higher education • Personal know-how
Organizational resources
• • • •
Innovation Service development Marketing Team know-how
Incremental learning
• On-the-job training • Learning by doing
Recombination of knowledge
• Team-based knowledge • Internal cooperation • External collaborative innovation
Table 5.2 presents descriptive statistics of the main variables related to service, competitiveness and learning strategies. The first four variables give basic information about the survey sample in terms of firm size, age, structure, and export orientation. On average, business service firms tend to be small and domestically oriented. Many have group affiliations, however. The next three variables describe the responses to questions about the service firms’ role in client relationships. On a scale of 0 to 3, respondents indicated that expert services are the most prevalent mode of operation with clients. Many firms also suggested that they carry out service projects relatively independently of the client. Fewer firms provide explicit solutions to their clients. These firms develop and supply more standardized service packages. Education, in-house training, and investments in service development describe the basic modes of knowledge creation in firms in any service industry.
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KIBS firms’ employees are very highly educated, and even investments in R&D exceed the average for manufacturing industries. Moreover, on-the-job training, measured here as number of days spent in training events, averages nine days per year, which is a substantial monetary investment for these small firms. It is thus evident that the firms in the sample are highly knowledge-intensive. Table 5.2
Descriptive statistics of main survey variables
Variable
Mean
Standard Minimum Maximum deviation
Employees Export share of sales revenue (%) Age (years) Service group subsidiary (%) Service solutions Expert services Independent Share of employees with higher education degrees (%) Training investments (days) R&D investments/sales (%) Competitiveness: Education Learning on the job Training in-house Marketing Reputation Teams’ capabilities
41 12 17.2 38 1.3 2.1 1.9
81.8 26 13.7 49 0.8 0.8 0.8
1 0 1 0 0 0 0
590 100 90 100 3 3 3
33 8.8 3.3
31 8.3 9.6
0 1 0
100 60 100
2.3 2.8 2.4 2.1 2.7 2.2
0.6 0.4 0.6 0.7 0.5 0.7
1 2 1 0 0 0
3 3 3 3 3 3
As regards how KIBS firms themselves perceive the sources of their competitiveness, the traditional view of incremental learning in client projects was emphasized by the sample firms. Reputation and in-house training are also factors that KIBS firm managers believe are important for their success. Thus, the popular view of KIBS firms, illustrated by these surveyed firms, places a lot of emphasis on individuals’ skills and expert strategies. 5.2.2
Management of Client Relationships
Relationships between KIBS firms and their clients were assessed with various qualitative measures as well as contractual features. For example, the nature of co-operation can be described through examining the role of the service
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provider in the relationship. Characteristics such as how early the service supplier is brought into the project, how actively it contributes to the project planning and specifications development and how close the co-operation is in the project define the service supplier’s relationship with the client. Is the service firm simply a source of temporary skilled labour, or can it provide the client with more strategically important knowledge such as project design and management know-how? The latter types of knowledge are more difficult to create and deliver, and they are also likely to enhance the profitability implications for the service provider. The contractual features assessed in this study include the division of rights to intellectual assets generated in the joint project, and possible (partial) exclusive dealing clauses required by the client. These kinds of control rights influence the service supplier’s motivation to expend effort and develop new services. Table 5.3 describes these basic contractual features. Control rights to intellectual assets generated in joint projects are given to clients in most firms and industries, although as illustrated in Table 5.3, this is not as self-evident in R&D services, management consulting, and engineering industries as it is in industrial design. Partial exclusivity clauses usually require that the service firm not supply to certain competitors of the client firm. Again, R&D services and industrial design represent the extremes among industries studied here. In Section 5.4 I will argue that the nature of the knowledge base in R&D services is different in specific ways from that in industrial design, and this is the reason for differences in client contracting (see also Leiponen 2004). Table 5.3
Service firms’ contracts with key clients
Type of contract
All Industrial Advertising Machine Electrical Management R&D firms design & process engineering consulting services
Control rights to client
2.2
2.8
2.4
2.2
2.1
2.1
1.7
Partial exclusivity
1.8
2.5
1.8
2.0
1.7
2.0
1.6
Scale: 0 (never) – 3 (always)
5.2.3
Why Outsource Service Activities?
The fundamental strategic decision by client firms related to service activities is whether to develop service competencies in-house or outsource them from external suppliers. The most relevant factors that affect the choice are the longterm implications of competence development and utilization. By outsourcing service functions, firms benefit from a broader selection of competencies and
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from the possibility to make suppliers compete against one another. Thus, outsourcing strategies can improve quality and cost effectiveness. However, if the service activities in question are strategically sensitive or unique, they are more likely to be supplied internally. Of course, this approach can be called a ‘core competence strategy’, whereby client firms internalize services that are in some sense ‘core activities’ and outsource other activities (Prahalad and Hamel 1990). The practical challenge with the core competence strategy is implementation: how to define what is core and what is not. In fact, it can be very difficult to identify the long-term performance ramifications for learning and innovation that arise from these strategic decisions. Additionally, interviews with Finnish business service clients indicate that most manufacturing firms do not have a service procurement strategy. This would facilitate the efficient utilization and internal sharing of knowledge obtained from external service suppliers. For example, division managers in large firms are generally not aware of the service suppliers of other divisions, even though synergies might arise from scale economies in procurement, efficiencies in contracting (transaction costs), and the development of trust between the firm and its suppliers.
5.3 5.3.1
MANAGEMENT OF KNOWLEDGE IN KIBS Knowledge Accumulation in Business Services
Clients are the most important source of knowledge for KIBS firms. It is, therefore, of utmost importance to record and share learning from client projects. Practices related to organizational knowledge and learning have been called knowledge management in the strategic management literature. Essentially, knowledge management entails practices to enable cumulative learning and the circulation of knowledge within the organization. Managing knowledge and competencies also necessitates the sharing of work practices and solutions to client problems. Thus, knowledge management is about converting individuals’ skills and learning into collective resources for the organization. One strategic implication is that the firm needs to concentrate on clients and projects that support the accumulation of a certain kind of knowledge. Even an expert organization supplying highly customized services is better off specializing in a clearly defined area of competence, in which it has a chance to gain a strong market position. Individual versus organizational resources have been studied by Spender (1996), among others. His analysis focuses not only on the distinction between knowledge held by individuals or an organization, but also on whether knowledge is tacit or codified. Figure 5.1 illustrates these dimensions in a matrix
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of effective knowledge types. Figure 5.2 operationalizes these concepts for the case of business service organizations. Individual
Organizational
Expertise, skills
Routines, processes
‘Automatic’
‘Collective’
Education, professional knowledge
Intellectual property, products, services
‘Conscious’
‘Objectified’
Tacit
Explicit
Source:
Modified from Spender (1996) and Cook and Brown (1999)
Figure 5.1
Dimensions of organizational knowledge
Individual
Tacit
Explicit
Organizational
External expert operation
Team-based knowledge/routines
Education levels
Service solutions and concepts Technology licensing
Figure 5.2
Operationalization of knowledge in the service firm
An empirical study reported in Leiponen (2003) examines the effects of these knowledge types on innovation and intellectual asset ownership. While the literature on organizational knowledge and learning (for example Grant 1996; Nonaka 1994; Spender 1996) often finds similar categories, analysis of what organizational purposes each of the knowledge types fulfils has been lacking. These performance effects are the focus of this research.
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Table 5.4 displays the survey indicators by industry to illustrate the tendency of different industries to emphasize different types of knowledge. For instance, industrial design is clearly oriented towards individual designers’ explicit and tacit skills. R&D services, on the other hand, emphasize both kinds of explicit knowledge; individual (formal education) and organizational (codified technologies). Finally, advertising is based on both kinds of tacit knowledge; individual (expert skills) and organizational (knowledge residing in teams). The internal structure of service firms influences their knowledge creation activities. The data in Table 5.2 indicate that some 40 per cent of the surveyed firms are subsidiaries in a service group. Many more firms participate in looser networks of service providers. Participation in an international network or group of companies can be particularly valuable, as emphasized by interviewed service firms and clients. International service groups tend to have training programmes, centralized research facilities, extensive shared databases, and service concepts that are made available to all subsidiaries. Even less formally organized service networks make a broad set of competencies available to clients of individual firms. Experts from diverse fields or different countries participating in the network may be called on to provide specialized knowledge in demanding projects. These kinds of international business group structures are very common in advertising and management consulting. Individual firms that are partners or members of these groups tend to be more successful in new service development, so the effects of the group structure are tangible. Technical service areas use international structures less frequently, although it is easy to imagine that potential benefits from the exchange of competencies and local presence can be substantial. 5.3.2
Motivation of Highly Skilled Professionals
Most knowledge-intensive business services employ highly educated experts, whose skills are strongly in demand in the labour market. One of the service firms’ key management goals is to help these experts fulfil themselves, and keep them motivated by offering stimulating assignments and various kinds of incentives. In addition to monetary and qualitative incentive systems, commitment can be enhanced by using certain features of employment contracts such as no-compete clauses and partnership or partial ownership schemes. Most business service managers, however, emphasize the importance of maintaining a collegial and creative work atmosphere and thus stimulating the intrinsic motivation of individualistic experts. Incentive systems need to be sensitive to whether individual employees or groups and teams are to be motivated. This determines the possible measures of performance. Measuring individuals’ performance creates strong incentives,
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Resources
Advertising
Machine & process engineering
Electrical engineering
Management consulting
R&D services
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24.5
22.0
21.6
67.0
37.1
2.4
2.3
1.9
1.9
2.1
2.1
0.6 0.20
1.3 0.07
1.3 0.24
1.2 0.24
1.9 0.22
0.9 0.29
2.0
2.6
2.1
2.1
2.2
2.3
Scale: 0 (not important) – 3 (very important), except for higher education levels (%) and technology licensing (0/1 binary variable)
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Individual explicit: Higher education degrees (% of employees) Individual tacit: Expert skills Organizational explicit: Service solutions Technology licensing (out) (0/1) Organizational tacit: Competitiveness based on knowledge in teams
Industrial design
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Table 5.4
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but it may hamper co-operation and knowledge-sharing in the organization. Team- or firm-level performance measures dilute incentives to a degree, but the work and co-operative atmosphere may be enhanced. Team incentives are particularly important if the basis of the firm’s competitiveness is collective knowledge instead of individuals’ skills (see Figures 5.1 and 5.2). Another management challenge in business service organizations is to strike a balance between individualistic experts and the needs of the organization as a whole. The goals of individuals and the organization are not perfectly aligned, despite possible incentive schemes. Typically, in a small knowledge service firm, the founder is a strong personality and an exceptionally talented designer, researcher, or analyst. In the early stages of the firm this is immensely valuable, as the firm needs to build its reputation, collect client references and find collaboration partners. However, dependence on a ‘star designer’ is also a long-term risk for the organization. When the star retires, the organization may be left without a sufficiently broad knowledge base on which to continue operations successfully. Therefore, effective knowledge management is highly critical for start-up service firms with growth aspirations. Knowledge that is accumulated in projects as well as management responsibilities should be shared, intrapreneurship should be encouraged and rewarded and joint practices should be developed right from the start. 5.3.3
Pricing Under Asymmetric Information
Contracting with clients is an interesting and challenging problem in an area of highly asymmetric information such as KIBS. Clients cannot know very precisely in advance how skilled and dutiful the service provider is in its activities. Even if the firms were to attempt to write explicit and detailed project contracts, there frequently arise unexpected circumstances, particularly in projects that involve innovation. Co-operation thus needs to be flexible and based on mutual trust. However, developing the firm’s reputation and trustbased client relationships can take a long time. Startup service providers can try to speed up the formation of client relationships by designing contracts that include performance guarantees and bonuses. Then the client pays less for services if substandard levels of productivity or quality are observed, or it pays more if goals are exceeded. These kinds of arrangements shift the project risk to the service supplier and naturally require measurement of performance. The potential advantage is that the credibility of the service provider is strengthened. Overall, however, performance measures and bonuses are used relatively rarely in service supply relationships. One of the reasons is that the client’s contribution to the success of the project may even surpass that of the service supplier, in which case strong incentives to the service firm do not much affect
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the outcome. Here, one could imagine setting up a temporary profit unit by combining the client’s and service supplier’s project teams. All members of this combined project team could be rewarded with bonuses for exceeding their goals. However, even this solution does not work, if performance in the project is very difficult to measure. An alternative approach is quality control applying various kinds of quality management systems and the standardization of service processes and output. Finally, risk can be shifted to the service firm by setting a fixed price for the project, which enhances incentives. Then, the service provider will operate efficiently since it will obtain the residual between the price and the total costs of operation. According to the Finnish survey information, small service firms use performance bonuses more often than their large counterparts. The reason may be exactly the kind of signalling of quality discussed above. Using performance bonuses is also more frequent in firms where customer satisfaction is assessed on a regular basis and project management and standardization are explicit areas of development. This kind of ‘codification’ of project management and performance expands the possibilities to use performance measures in client contracts. Performance pricing itself can be a means to express the value of successful project output to the client. Without these kinds of mechanisms of control, describing the service and its impact may be difficult. Performancebased standards, measurement and pricing may thus be useful tools for growth-oriented knowledge service firms.
5.4
INNOVATION IN FINNISH KNOWLEDGE SERVICE FIRMS
Finnish knowledge service providers invest significant resources in service development (Table 5.5). Competencies are created through training and R&D activities as well as joint innovation projects with clients or other service firms. Additionally, software and equipment suppliers are important innovation partners for some service firms. Universities are a relevant source of knowledge and collaborators particularly for R&D service providers. As a result of various investments in service development, over 40 per cent of the firms surveyed introduced new services in the markets, and more than half of the firms report having significantly improved existing services in the three years preceding the survey. Interestingly, these shares of innovating firms in the population do not much differ from Finnish manufacturing industries surveyed by Statistics Finland (1998). Among the business service industries studied here, management consulting and R&D services were most frequently engaged in the development of new kinds of competencies and services. Firms
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Table 5.5
Mean indicators of Finnish KIBS industries’ service development activities Advertising
Machine & process engineering
Electrical engineering
Management consulting
R&D services
54 20 3.3
27 20 2.2
48 12 1.3
67 21 2.1
43 24 2.3
61 24 2.7
65 20 12.7
74 47 12 44 30 45 54
55 33 0 22 22 55 18
74 54 5 37 10 47 64
81 35 5 57 35 46 54
74 52 15 56 22 27 40
78 39 22 28 22 61 82
60 55 25 40 75 48 50
5.8
6.5
5.1
7.2
2.4
7.3
5.3
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R&D investments > 0 (%) R&D department or team (%) R&D investments/sales (%) Collaboration: With customers (%) With service firms (%) With competitors (%) With suppliers (%) With universities (%) Service innovations (%) Service improvements (%) Share of sales from innovative services (%)
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in advertising, industrial design, and technical (engineering) services were more likely to rely on incremental learning in client projects, in which case the probability of more radical service innovations is small. The service and competence strategies introduced in Sections 5.2 and 5.3 seem to have an impact on how client relationships are organized. One concrete aspect is how control rights to knowledge created in projects are split between the client and the service supplier. For instance, if the project generates patents, software, or ideas for new services, can the service firm control these assets and sell them to other clients or not? This division of rights depends, among other things, on the nature of the underlying learning processes (see Table 5.6). Service firms based on incremental learning tend to yield the rights to control knowledge assets to clients, while firms that learn and innovate by combining diverse internal and external sources of competence tend to retain rights to both service output and knowledge associated with it. Additionally, firms that develop standardized service solutions often retain control rights to intellectual assets, while firms supplying pure expert services are more likely to yield the rights to clients. Table 5.6 Means of a set of variables concerning KIBS firms, for different values of the control rights variable Variable
Control rights sometimes or always kept by the KIBS firm
Employees Sales per employee (1000 euro) Business group member (%) Solutions providers (0–3) Expert service providers (0–3) R&D intensity (%) Knowledge accumulation through internal and external co-operation* Knowledge accumulation through incremental learning* Observations
Control rights always obtained by the client
36.6 126 35 1.3 1.9 8.4
46.3 106 42 1.2 2.2 1.8
0.11
–0.16
–0.25 100
0.36 67
* denotes variables derived from a principal component analysis of collaboration, training, education, and R&D activities.
Furthermore, the statistical analysis reported in Table 5.7 suggests that control rights to intellectual assets are associated with innovation performance.
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Although the statistical difference between innovators and non-innovators seems small here, in a regression analysis this difference becomes statistically significant (see Leiponen 2002). The interpretation suggested here is that control rights create incentives to invest in R&D and develop new services and technologies, since the service firm can appropriate the returns by selling the novelty to many clients and cumulatively build on it over extended periods of time. If clients insist on obtaining rights to the service supplier’s innovative ideas, the supplier is not so motivated to develop new ideas. Indeed, clients should keep in mind that today’s control rights allocation may impact the service supplier’s innovativeness in the future. Clients’ attempts to excessively control the supplier may suppress the prospects of success in the relationship in the long run. Table 5.7 Variable
Means of independent variables for innovators, non-innovators No Improvement No Innovation improvements innovations
Employees 29 Business group (%) 27 Output control rights to client (scale 0–3) 2.3 Partial exclusivity (scale 0–3) 1.7 Knowledge accumulation through internal and external co-operation* –0.61 Knowledge accumulation through incremental learning* 0.00 Higher educated employees (%) 22.8 Expert skills (scale 0–3) 2.0 Service solutions (scale 0–3) 1.1 Technology licensing (%) 11 Team-based knowledge (scale 0–3) 2.1 R&D department (%) 8 R&D intensity (%) 1.7 Observations 66
56 51
30 34
61 48
2.1 1.9
2.2 1.9
2.1 1.7
0.48
–0.49
0.63
–0.2 36.0 2.2 1.5 27 2.3 29 5.0 86
0.30 26.2 2.1 1.2 16 2.1 16 2.4 85
–0.38 35.7 2.0 1.4 24 2.4 24 4.9 67
* denotes variables derived from a principal component analysis of collaboration, training, education, and R&D activities.
The statistics in Table 5.7 also demonstrate that learning strategies as well as types of organizational knowledge correlate with innovation performance. Few service firms with emphasis on incremental learning launch service innovations. Co-operative (combinatory) knowledge creation strategies are more conducive to innovation. Service firms launching new or significantly improved services are also more likely to provide service solutions than non-innovating firms. Additionally, higher education (explicit individual knowledge), technology licensing and R&D activities (explicit organizational knowledge), and team-based knowledge (tacit organizational knowledge) are correlated with
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successful innovation. Thus, three of the four types of knowledge identified are useful for innovation; only tacit individual knowledge is not valuable as the sole basis for learning and innovation. Future research could examine in more detail if different technological fields require different types of knowledge for successful innovation. In any case, the nature of learning and the business strategies of service firms are closely intertwined with innovation. Learning may have considerable long-term implications for the evolution of firms and their services. The Finnish survey data (not reported here; see Leiponen 2001) also suggest that service strategies influence firms’ capabilities to adopt and use new technologies. Suppliers of service solutions appear to benefit more than suppliers of expert services from business opportunities opened up by improved information and communication technologies. Standardization of service processes and practices to assess and articulate service quality associated with packaged service solutions are more conducive to using information and communication technologies in these processes and in searching for new clients. Strategic differences among KIBS service suppliers have implications for the broader innovation system too. Service solutions are more likely to generate increasing returns to scale, and hence they may facilitate growth and internationalization of firms. Growth and international operation of Finnish service firms would generate positive externalities for industries using services. A more diverse and higher quality supply of knowledge-intensive business service solutions influences the client firms’ competitiveness positively. Expert services, meanwhile, are an important knowledge and competence resource, particularly for manufacturing firms. Expert service firms form a reserve of highly educated and skilled employees, which also provides the valuable functions of circulating existing knowledge in the economy and producing new insights based on learning from service operations. These kinds of experts may be highly valued partners in their clients’ innovation projects.
5.5
POLITICS AND POLICIES OF KNOWLEDGEINTENSIVE BUSINESS SERVICES
The European Union and the OECD have been studying and debating the economic importance of knowledge-intensive business services in recent years. The shares of service sectors in the gross domestic products of industrialized economies have been growing steadily for the past several decades. KIBS are among the industries that grow most rapidly. Within the OECD, employment in business services has grown at an average rate of 10 per cent per year, although the share of these services in total employment remains below 5 per cent. Nevertheless, high growth is expected to continue, particularly in computer-related services. Moreover, KIBS and computer software industries
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represent the ‘high technology’ among service industries in terms of their knowledge intensity. Other sectors benefit from this concentration of competencies, as according to recent studies, KIBS inputs improve productivity in user sectors (Luukkainen and Niininen 2000; Tomlinson 1999). KIBS are ‘high-tech’ also in the sense that information technology is expected to revolutionize these services, even more pronouncedly so than other service industries. For example, the Finnish Science and Technology Policy Council has recently stated that the adoption of information technologies in business services is one of the special challenges of the innovation system (STPC 2000). It thus appears that KIBS industries are expected to operate as a kind of an engine of the ‘new’ economy, where efficiencies are derived from the use of modern information and communication technologies, facilitating the spread of new knowledge from KIBS industries to other industries using service inputs. 5.5.1
Information Technology in Knowledge Services
The empirical material collected in Finland indicates that some of the expectations placed on KIBS industries may be overstated. The data referred to here suggest that information and communication technologies improve the efficiency of service processes and communication with clients. However, technology is not likely to be successfully used as the main basis for knowledge services. Service firms’ clients interviewed in the project emphasized the need for personal contacts and face-to-face communication. The more complex and longer-lasting the service project, the more important it is to meet in person, particularly in the early stages of the project. Face-to-face meetings facilitate the creation of personal relationships and trust, which can be essential especially in projects where innovation is a substantial component. Generating new ideas and solving complex problems in collaboration can be achieved only in part through electronic communication. Information technologies are also expected to help increase service exports. However, exporting from a home base may not be the main mode of internationalization for knowledge-intensive business service firms. According to international statistics, foreign direct investments are clearly more important than exports in services (OECD 1999). In most service industries, it is still crucial to have a local presence in order to be close and visible to the users. This is accentuated in KIBS, the operations of which are entirely based on transferring competencies and maintaining and building reputation. 5.5.2
Business Competencies and Innovation Policy
Finnish political decision-makers have repeatedly expressed their concern over deficiencies in the areas of marketing and business competencies in Finnish
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industries, particularly in the case of small and medium-sized manufacturing companies (STPC 2000). More research is called for in the fields of business strategy, management, and marketing. The interviews with service executives carried out in this study indicated that the connections between business service firms and academic scholars of business studies are almost non-existent. It is surprising that not even management consultants and advertising designers, who seek and use business competencies and knowledge very intensively, find conversations with academic researchers to be useful. This might be a fruitful area of political intervention. For instance, policies could support joint research projects between KIBS firms, their clients, and academic business researchers, thus facilitating potentially fruitful connections. These kinds of universityindustry research consortia have been successfully ongoing between technical universities and the manufacturing sector for decades. However, if the reason for the lack of connections is deeper and results from a weak applicability of Finnish academic business research, perhaps a longer-term reorientation of research investments and emphases is necessary. 5.5.3
Incentives and Support for Service Innovation
To what extent should KIBS firms’ innovation activities be supported by public funding? The usual logic behind the argument that innovation in general should be supported by governments is that firms’ knowledge tends to leak to their competitors, and as a result, investments in knowledge creation – innovation – are considered to be suboptimal because innovators do not take into account the benefits they create for other organizations. The fundamental assumption is that all innovation is productive and useful from society’s point of view. These ideas originated in the new theories of economic growth, where innovation either enhances product value or reduces production costs. Do service innovations fulfil these criteria? Inherent uncertainty in all innovation activities implies that not even in manufacturing do firms know beforehand if the project will result in a useful new product or technology. Many inventions fail the test of markets. The same applies for service innovations: new services may turn out to be useless or of low value, but if there is a realistic chance that service innovations increase the productivity and efficiency of firms using the services, they may generate positive externalities for firms and sectors. The types of business services identified in this study (expert services and standardized solutions) have different needs in terms of innovation policy. Expert skills are built through learning on the job, formal education and jobrelated training. Personal skills cannot be expected to generate equally important externalities as codified and conceptualized information. It is thus possible that investments in these skills by experts themselves and their employers are already
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in some sense closer to optimal levels without additional public intervention. Besides, education is heavily supported by the Finnish government – all degree programmes, not to mention primary and secondary education, are free of tuition fees. In contrast, service concepts easily spill over to competing service providers, which implies that investments in their development are likely to be substantially below the ‘optimal’ level. In this line of thinking, innovation policy could thus support the development of innovative and ‘packageable’ service solutions or technologies, in the same way as the development of more tangible products and technologies is supported. Perhaps surprisingly, public funding for KIBS innovation activities is already quite prevalent. One in every four service firms in the survey sample participates in the national innovation system as a recipient of funding from the National Technology Agency (Tekes) or another governmental source. These funds tend to be directed to R&D and engineering firms, however: very few management or advertising service firms receive support for their innovation activities. Firms in management and advertising industries perhaps compensate for the lack of innovation support by engaging in international service chains and networks. From the innovation system’s point of view, however, it might be useful to include the most innovative firms of management, design, advertising and marketing services within the research consortia and networks of support, in order to engage and improve marketing and business competencies within the innovation system. Thus, a suggestion for policy intervention is to experiment with innovation programmes for business service innovations, or alternatively, engage management professionals in technology programmes. Investments could initially be limited in order to simply learn about collaborative innovation processes in this area. Most business service firms would probably not be interested in such innovation programmes, but firms with strong competencies and creative ideas but limited resources to develop and implement their ideas would benefit and consequently generate externalities on other service firms as well as the whole innovation system. KIBS firms could also play a role in commercializing technological innovations of small high-tech manufacturing firms. Available reports point out that small and medium-sized firms use business services less than large firms, and they thus do not gain access to the knowledge available in service industries. Small firms may have financial constraints or they may lack the internal competencies that are necessary in order to even benefit from highly knowledge-intensive services. Additionally, service firms themselves tend to prefer large firms with sizeable service budgets as clients. Therefore, small firms’ procurement of knowledge services might be a relevant object of public support. For example, the commercialization of new technologies by small start-up companies, another identified weakness in the Finnish innovation
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system, might be accelerated by providing access to marketing, management, and design services.
REFERENCES Barras, Richard (1986), ‘Towards a Theory of Innovation in Services’, Research Policy, 15, 161–73. Barras, Richard (1990), ‘Interactive Innovation in Financial and Business Services: The Vanguard of the Service Revolution’, Research Policy, 19, 215–37. Cook, Scott D.N. and John Seely Brown (1999), ‘Bridging Epistemologies: The Generative Dance Between Organizational Knowledge and Organizational Knowing’, Organization Science, 10 (4), 381–400. Evangelista, Rinaldo (2000), ‘Sectoral Patterns of Technological Change in Services’, Economics of Innovation and New Technology, 4, 183–221. Freidson, Eliot (1988), Professional Powers: A Study of the Institutionalization of Formal Knowledge, Chicago: University of Chicago Press. Gallouj, F. (1997), ‘Innovation in Services’, Research Policy, 26, 537–56. Grant, R.M. (1996), ‘Toward a Knowledge-Based Theory of the Firm’, Strategic Management Journal, 17 (Winter Special Issue), 109–22. Hansen, M.T., N. Nohria and T. Tierney (1999), ‘What’s your Strategy for Managing Knowledge?’, Harvard Business Review, (March–April), 106–16. Hauknes, Johan (1998), Services in Innovation – Innovation in Services, Research report, Oslo: STEP Group. Leiponen, Aija (2001), Knowledge Services in the Innovation System, Helsinki: ETLA. Leiponen, Aija (2002), ‘Control of Intellectual Assets in Client Relationships: Implications for Innovation’, unpublished manuscript, Ithaca, NY: Cornell University. Leiponen, Aija (2003), ‘Organizational Knowledge and Innovation in Business Services’, Applied Economics and Management working paper 03–22, Ithaca, NY: Cornell University. Leiponen, Aija (2004), ‘Organization of Knowledge Exchange: An Empirical Study of Knowledge-Intensive Business Service Relationships’, Economics of Innovation and New Technology (forthcoming). Luukkainen, Sakari and Petri Niininen (eds) (2000), Teknologiaintensiiviset palvelut ja kansallinen kilpailukyky, Espoo: VTT Group for Technology Studies. Miles, Ian (1994), ‘Innovation in Services’, in Mark Dodgson and Roy Rothwell (eds), The Handbook of Industrial Innovation, Aldershot: Edward Elgar, pp. 243–56. Miles, Ian, Nikolaos Kastrinos, Rob Bilderbeek and Pim den Hertog (1995), KnowledgeIntensive Business Services: Users, Carriers and Sources of Innovation, European Innovation Monitoring System (EIMS) Report. Mowery, David C. (1983), ‘The Relationship between Intrafirm and Contractual Forms of Industrial Research in American Manufacturing, 1900–1940’, Explorations in Economic History, 20, 351–74. Nonaka, Ikujiro (1994), ‘Dynamic Theory of Organizational Knowledge Creation’, Organization Science, 5 (1), 14–37. OECD (1999), Benchmarking Knowledge-Based Economies, Paris: OECD Science, Technology and Industry Scoreboard. Prahalad, C.K. and G. Hamel (1990), ‘The Core Competence of the Corporation’, Harvard Business Review, 68 (3), 79–91.
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Spender, J.-C. (1996), ‘Making Knowledge the Basis of a Dynamic Theory of the Firm’, Strategic Management Journal, 17 (Winter Special Issue), 45–62. Statistics Finland (1998), ‘Innovaatiotutkimus 1996’, Helsinki: Statistics Finland. STPC (2000), Tiedon ja osaamisen haasteet (Review 2000: The Challenge of Knowledge and Know-how), Report, Helsinki: Science and Technology Policy Council of Finland. http://www.minedu.fi/tiede_ja_teknologianeuvosto/eng/publications/Review_2000. html#2.4. Sundbo, J. (1997), ‘Management of Innovation in Services’, Service Industries Journal, 17 (3), 432–55. Tomlinson, Mark (1999), ‘A new role for business services in economic growth’, Paper for the TSER Conference on the Globalising Learning Economy, Manchester: ESRC Centre for Research on Innovation and Competition. Tordoir, Pieter P. (1995), The Professional Knowledge Economy: The Management and Integration of Professional Services in Business Organizations, Dordrecht: Kluwer Academic Publishers.
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6. Nokia: A giant in the Finnish innovation system* Jyrki Ali-Yrkkö and Raine Hermans 6.1
INTRODUCTION
In the 1990s, Nokia grew to become one of the world’s leading high-tech companies. Despite the fact that Nokia has become multinational, a significant share of its activities is still located in Finland. In the latter part of the 1990s, the most visible impact of Nokia on the Finnish economy was its contribution to GDP growth. In 2000, the contribution of Nokia to growth peaked, exceeding 1.6 percentage points. In the same year, Nokia accounted for 2.8 per cent and 20 per cent of Finnish GDP and total exports, respectively (see Ali-Yrkkö et al. 1999). In 2001 the global recession in the telecommunications industry hit Nokia, too, and the company’s contribution to GDP growth dropped close to zero. However, in addition to GDP, GDP growth and exports, Nokia also has an important role in the Finnish innovation system. Nokia’s role is two-sided. On the one hand, Nokia utilizes resources from the innovation system. But at the same time the company produces innovation resources that diffuse outside the company. To evaluate this role more precisely, in this chapter we examine Nokia’s influence on the innovation activities of other companies and universities as well as on public sector income and expenditures. ‘Innovation system’ refers to the operation and interaction of universities, research institutes, other public sector organizations, and private businesses, which together influence the creation, diffusion, and utilization of novel know-how. This study aims to provide answers to the following questions: – How has Nokia influenced the know-how and innovation activities of universities in Finland? – How has Nokia influenced the know-how and innovation activities of other companies? – How has the public sector promoted Nokia’s innovation activities? – What has been the role of the public sector in Nokia’s R&D projects? – What is the impact of Nokia’s partner network on innovation activities? 106
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A variety of data sources have been used to answer these research questions. One important data source has been official statistics. The study also makes use of information in a book on Nokia’s history (Häikiö 2001) and in its annual reports. In addition, numerical data relating to Tekes have come directly from Tekes. Finally, interviews conducted while this research was going on have been used as qualitative data.1 Interviews were utilized especially where quantitative data were not available or were not measurable. In addition, interviews were used to deepen the analysis of numerical information. The chapter is structured as follows: Section 6.2 examines ‘what Nokia has got from Finland’. The benefits reaped by Nokia in terms of the innovation system form the framework for analysis. Section 6.3 looks at the other side of the matter, that is, ‘what Finland has got from Nokia’. Section 6.4 provides a summary and conclusions.
6.2 6.2.1
FINLAND’S INVESTMENTS IN NOKIA’S GROWTH R&D Funding by Tekes
In Finland, a great majority of public R&D funding to the private sector is channelled through Tekes, which is an organization under the Ministry of Trade and Industry (MTI). In the 1990s Tekes increasingly directed its funding (grants and loans) towards companies in the information and communication technology industry. As a consequence of this development, in 2001 about onethird of the funding by Tekes was targeted at the information and communication industry. Nokia is among the hundreds of companies in Finland that have received public funding for their R&D activities. The amount of Tekes financing received by the company has varied considerably. In 1969 Nokia received a total of the equivalent of 34 000 euros from the MTI Technology Office (Tekes’s predecessor), while in 1999 the respective figure was the equivalent of 18 million euros of Tekes funding. In 2001 Nokia received Tekes funding worth approximately 12 million euros. In the 1970s the share of the MTI Technology Office funding of Nokia’s total R&D expenditures was 7 per cent on average (Figure 6.1). In the first two years of the 1980s Tekes funding gained a significant position in the financing of Nokia’s R&D. In 1980 over one quarter of the company’s total R&D was financed by Tekes, and in the following year the share remained at about 15 per cent. After these peak years, the share of Tekes funding of Nokia’s total R&D spending decreased significantly. During the recession at the beginning of the 1990s, the importance of Tekes funding grew again. With the support of public funding, the Nokia Research
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2001
1997
1993
1989
1985
1977
1973
20 18 16 14 12 10 8 6 4 2 0
EUR, mill.
30 25 20 % 15 10 5 0
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1969
108
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1981
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Percent of Tekes funding of Nokia’s total R&D expenditure Tekes funding, EUR, mill. Figure 6.1
Tekes funding and its share of Nokia’s total R&D expenditure
Center managed to sustain the continuity of its research activities even through the most difficult years of the economic slump (Häikiö 2001, p. 96). In the second half of the 1990s the share of Tekes funding of Nokia’s total R&D expenditure was around 1.5 per cent on average. When the amount of Tekes financing is compared relative to Nokia’s R&D activities in Finland, then the share of Tekes financing is slightly below 2 per cent over the same time period. In the 1990s, most of the Tekes funding received by Nokia was directed towards Nokia Research Center projects. In the period 1993–2001 the research centre received 55 per cent on average of all Tekes funding granted to the Nokia Group (Häikiö 2001). Taken together, we can conclude that although the amount of financing granted to Nokia by Tekes increased in nominal terms in the 1990s, its share of Nokia’s total R&D expenditure has decreased significantly. In terms of the number of projects, Tekes-funded Nokia projects have increased. While in the 1970s Nokia received Tekes funding for an average of nine projects annually, in the 1980s and 1990s the corresponding figures were 19 and 37, respectively. Tekes, however, finances only a part of the costs of companies’ research and development projects (so-called company projects of Tekes). Usually, most of the costs of company projects are financed by the company or group of companies. Figure 6.2 examines the share of Tekes financing in all company projects, and separately in Nokia projects. Tekes’ share of financing in company projects decreased towards the 1990s (Figure 6.2). Tekes’ financing share of the company projects has been 32 per cent on average. Hence, around 70 per cent of the financing has come from other sources, mainly from the companies themselves.
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60 50 40 % 30 20 10 0 1987
1989
1991
1993
1995
1997
1999
2001
All company projects Nokia projects Source:
Ali-Yrkkö & Hermans (2002)
Figure 6.2 Share of Tekes financing in all its company projects and Nokia projects The share of Tekes financing in Nokia projects has been smaller than in company projects on average. In the 1990s Tekes financed 26 per cent of Nokia projects on average, while the share of other financing, primarily Nokia’s own share, has been about three fourths of the projects’ total costs. In 2000 and 2001 Tekes’ share of financing in Nokia projects exceeded 30 per cent, and has thus been above the average share of financing in company projects. Time series analysis shows that Tekes’ share of Nokia project financing has varied a great deal, and thus it is likely that the current increase is only temporary. Until now, we have considered the financial side of Tekes funding. However, the significance of Tekes’ funding cannot be estimated only through financial flows. Public R&D funding has also had strategic and long-term impacts. In many interviews, it was stated that the effects of Tekes funding has impacted the length and determination of the R&D projects. One interviewee described the impact of this financing as follows: Tekes is a binding force which stabilizes research activity in this turbulent environment. If a decision has been made to start on something, it is out of the question to change direction or start doing something else. It won’t work, because we have a deal [with Tekes]. (R&D manager, Nokia)
6.2.2
Highly Qualified Personnel from Finland
As the significance of research activity has grown in the telecommunications industry, Nokia has tightened its links to universities and research institutes.
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As the need for highly skilled labour has also increased, Nokia has attempted to influence the level and direction of higher education (Häikiö 2001, p. 87). As the need for qualified personnel grew in the 1990s, Nokia’s role in education policy became more effective (Häikiö 2001, p. 98). Through the Federation of the Finnish Electrical and Electronics Industry Nokia strove to increase the number of university starting places available in the fields of electronics, telecommunications, and information technology. For instance in 1997, Nokia estimated that over the years 1997–2000 the need for technically skilled labour in Finland would be about 6500 people (Häikiö 2001). This figure was about two thirds of all the graduates (in Finland) in fields that Nokia considers relevant. In the fields that are central to Nokia, that is electronics, information technology and telecommunications, the number of university starting places available began to grow in the middle of the 1990s. In the 1990s, the company needed highly qualified R&D personnel and the number of people employed in R&D at Nokia increased rapidly. In addition to tripling its overseas R&D in a few years, Nokia also recruited a significant number of R&D employees in Finland (Figure 6.3). Nokia has played an active role in research projects with the Finnish universities of technology. In addition to the acquisition of research information, 20 000 16 000 12 000 8000 4000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2002E R&D personnel in Finland
Sources:
R&D personnel abroad
Häikiö (2001, p. 84) and authors’ estimates
Figure 6.3
Nokia’s R&D personnel in Finland and abroad
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the projects have served as an important form of recruitment. The following quotations describe the significance of research projects as a recruitment channel: Especially during these times after the mid-1990s we [at Nokia] had very frequent recruitment and then all one could get was students about to graduate, or even third or fourth year students, with whom we usually or almost every time ended up with thesis work here. (R&D manager, Nokia). We do have 43 nationalities here [at Nokia Research Centre] and a good many of them have come through university networks and university co-operation. (R&D manager, Nokia).
Quotations show that co-operation has had an important role in screening a potential labour force. Nokia has been able to find new employees with the competencies and the know-how they needed. 6.2.3
Finland as the Test Laboratory for the Latest Technology
The government had a large role especially in the early phases of the development of mobile communications in Finland. At the turn of the 1960s, Nordic postal and telecommunications companies began planning a pan-Nordic automatic mobile communication network, NMT. Open standards and equipment compatibility were focused on in the planning of the NMT. These actions aimed at promoting competition among equipment manufacturers (Häikiö 1998, p. 32). Nordic Telecommunications administrators therefore guaranteed competition between manufacturers, from which the whole industry has subsequently benefitted. At the beginning of the 1980s the Nordic NMT network remained the world’s most extensive mobile network measured by the number of users (Paija 2001). It was also a network where roaming had been contracted for, and a number of operators from various countries took part. Nordic equipment manufacturers got invaluable experience from manufacturing NMT networks and phones, which they have later utilized. The government also had a significant role in the creation of the panEuropean GSM (Global System for Mobile Communication) standard at the turn of the 1970s. In Finland, the Post and Telegraph Office financed GSM research by industry and technical universities, the first of which was conducted in 1981 (Häikiö 1998, p. 39). Tekes also financed these activities, the benefits of which were only realized years later. The first large programme by Tekes was The Convergence of Information Technology [part of a larger framework called ‘The Development Programme for Information Technology’] in 1984. … In that programme, those protocol and database tools were made by teams, which went to Nokia and made GSM. (Professor, university/research institute)
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If we looked at where all those people came from, and then the tools and the knowhow, which were developed in the 1980s, Tekes’ programme [The Convergence of Information Technology] has given birth to incredible results, combined with the business know-how and the competence in NMT centres and terminal equipment that Nokia then had. It was the combination of these competencies. … And the result of this combination is now visible to us. These would never have been accomplished without Tekes. (Professor, university/research institute)
In 1987 thirteen European countries signed a contract in which the implementation of the GSM system was agreed upon. In addition to standardizing those systems that cross borders, governments had another important role in the development of mobile communications, which was the freeing of competition. Finland, among other countries, deregulated its telecommunications industry, which led to more open international competition. In conclusion, we can state that Finland’s early presence in the international mobile networks created a good test field for Nokia. Firstly, NMT was the world’s first automatic mobile network covering several countries. The experiences gained from it could later be utilized. Secondly, the stepwise process to free competition in the telecommunications industry led to the founding of Radiolinja Oy. In 1991 Nokia sold its first GSM network and the customer was Radiolinja. Radiolinja opened its GSM mobile network as the first operator in the world, and the event received a great deal of publicity internationally (Häikiö 1998, p. 130). Opening the world’s first commercial GSM network brought Nokia an important reference for the future. However, there were also other operators opening a GSM network in the same year. Hence, in 1991 Nokia was not the only equipment provider with a working GSM solution. In addition to the development of the NMT and GSM, Finland has probably acted as a pilot country for Nokia in other ways too. In Finland the mobile phone penetration has been one of the highest in the world for a long time. One can presume that the high penetration has partly reinforced Nokia’s belief that it will rise to similar figures in the rest of the world. Faith in high growth rates has possibly also ensured that the company has invested enough in research and development.
6.3 6.3.1
NOKIA’S IMPACTS ON THE FINNISH INNOVATION SYSTEM Transfer of Know-how to Other Companies
Nokia’s own operations are reflected in other companies in Finland. The most central channel concerning the innovation system is Nokia’s co-operation with other companies. Nokia co-operates both in production and in research and
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development with numerous companies. In 2000 there were about 300 companies in Nokia’s ‘first tier’ partner network. There were from 18 000 to 20 000 employees in these companies who worked with products delivered to Nokia (Ali-Yrkkö 2001). One can roughly estimate that, taking into account Nokia’s partners, Nokia’s share of Finland’s employment is slightly below 2.5 per cent. The width and depth of Nokia’s co-operation with other companies has changed remarkably during the past twenty years (for details, see Ali-Yrkkö 2001). This development can be classified into four phases, namely: subcontracting in manufacturing; partnerships in manufacturing; R&D subcontracting; and R&D partnerships. In the 1980s, co-operation with other companies was mostly traditional subcontracting (Phase 1). With the exception of a few companies, very close co-operation did not exist. Nokia used subcontracting mainly as a buffer to stabilize its manufacturing capacity. The 1990s marked profound changes. The global telecommunications market exploded and Nokia also benefitted from this growth. As a response to the changed situation, in the early 1990s Nokia started to rely more on outside suppliers and to search for long-term co-operation partners (Phase 2), which helped the company to respond to the challenge of shortening product life cycles and market expansion. Consequently, co-operation with other companies became more systematic when it was seen as a permanent mode of manufacturing operation. Closer co-operation required frequent and undistorted information exchange between partners. In the latter part of the 1990s, Nokia also started to increasingly use software and R&D subcontractors (Phase 3). Hence, in addition to manufacturing, co-operation with other companies also included R&D activities. However, despite long-term agreements, in many cases the relationship can be classified as subcontracting rather than a true partnership because invoicing is usually based on hours rather than results. Currently, it seems co-operation in R&D and software development will move more toward partnership (Phase 4). Suppliers will take more development risk and if the product is successful, profits will be shared between the partners. In other words, moving toward true partnership will lead to changes in risk- and reward-sharing. Taken together, the scope and depth of Nokia’s networking have shifted considerably. However, these different phases of co-operation do not fully exclude one another. While today the focus is on partnerships, the company continues also to use subcontracting. From the viewpoint of the Finnish innovation system, the most interesting aspects of co-operation are those which at least somehow relate to R&D. Cooperation in R&D can be examined by analysing Nokia’s co-operation in R&D projects financed by Tekes.
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In most of the Tekes-financed Nokia projects there have also been other partners. The projects have not only involved Nokia’s internal research and development; most of the time other parties have been engaged as well. The share of co-operative projects has increased continuously. Currently there are at least some partners involved in almost all of the Tekes-financed Nokia projects. Compared to the mid-1990s, the co-operation with research institutes and universities has increased especially (for details, see Ali-Yrkkö & Hermans 2002). With the help of research and product development co-operation, know-how diffuses from one party to the others. Externalities from R&D activity, that is, the diffusion of know-how from one party to others, have a great significance for society. Public grants directed to research and development are usually justified by these externalities. Figure 6.4 examines Tekes’ latest programmes, which concern the information and communications cluster. The programmes included in the figure are: Electronics for the Information Society (ETX) and Telecommunications: Creating a Global Village (TLX). Both programmes include business projects as well as research projects. The figure includes those Nokia partners that have at least three co-operative projects with Nokia. Figure 6.4 shows that many companies and universities have co-operated with Nokia. There are both small and big companies amongst the partners. Also the partners’ industries vary a great deal. The network includes component and part manufacturers (like Eimo, Aspocomp and Filtronic), contract manufacturers (like Elcoteq and Flextronics), software houses (like Aplac, CCC and SSH Communications Security), production automation manufacturers (like JOT Automation) and operators (like Finnet, Sonera, and Elisa). In addition to the companies shown in the figure, Nokia has co-operated with many other parties regarding the TLX and ETX programmes. These organizations have been involved in less than three projects with Nokia, which is why they are not included in the figure. Among those left out of the picture are both large and small companies. Many of the small companies are young. Based on the interviews, co-operation with Nokia has had various influences. First, during the R&D co-operation companies share their knowledge with each other. Usually, partners have common teams, which meet frequently. Naturally, close co-operation requires deep personal and organizational trust between partners, for the companies often exchange highly confidential information. The following quotations describe the significance of the transfer of know-how. Via Nokia the project group included one foreign company which participated in planning [of the product to be developed]. We got one kind of core technology from them. (R&D manager in a Nokia partner company)
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JOT Automation Oyj Suunto Oy
NetHawk Oy Vaisala Oyj Polar Electro Oy
VLSI Solution Oyj
Ultraprint
CCC Aspocomp Oy
Picopak
Kone Oyj
Fincitec Oy
Elcoteq Network Oyj Benefon Filtronic LK Oy
Eimo Oyj
Satel Oy Flextronics International Finland Oy APLACS Solutions Oy Instrumentointi Oyj
ABB Elektrobit Oy
University of Oulu VTT Nokia Mobile Phones Nokia Research Center Nokia Networks Tampere University of Technology
Helsinki University of Technology Sonera Teleste
Tellabs Oy
Efore Oy
Defence Forces Nokia Multimedia Terminals
University of Helsinki
Finnet Group
Lappeenranta University of Technology TecnomenElisa Communications Intellitel Communications Oy
University of Tampere
SSH Communications Security Ericsson ICL AmiEdu * The figure includes both company ventures and targeted research projects. Included are partners
with a minimum of three projects with Nokia. The information is based on the final reports of the ETX and TLX programmes. The figure is interpreted so that the more projects the organization is involved in, the larger is its circle and the closer it is to the centre. The figure was drawn in the course of the ‘Evaluation of Finnish R&D Programmes in the Field of Electronics and Telecommunications (ETX, TLX and Teletronics I)’ project.
Figure 6.4 Nokia’s co-operation network in Tekes’ ETX and TLX programmes* Concerning the technology, we learned a great deal [in this project]. … I suspect that at this moment we have the world’s top knowledge concerning this [the developed system], which we can present. We also learned about the markets. We acquired contacts in Finland as well as the rest of the world. (R&D manager in a Nokia partner company)
In addition to knowledge diffusion, for many SMEs, Nokia works as a systems provider, into whose solutions their products are incorporated, as the following example shows. We saw it, that we can make the technology, but without the help of Nokia and its brand in the market, we cannot survive alone. Nokia worked as a marketing channel, and in this Nokia was our most important customer, and so we thought that Nokia
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could manage the distribution of these products. (R&D manager in a Nokia partner company)
Because of their limited resources, the significance of marketing channels has been important particularly for SMEs. Although many companies in the ICT cluster operate globally today, there is still much remaining to develop in this aspect. The lack of marketing know-how and channels complicates and inhibits SME internationalization. One interviewee presented it as follows: If I look at this problem of being Finnish, then … we’ve got very thin internationalization. People with international experience, fluent language skills, ability to work with foreign cultures, active contacts in other countries. We have far too few of them. It shows in business [and] it shows on the academic side. Being the best in the observation class [a reference point/standard-setter], … it is not quite enough. (Professor, university/research institute)
However, the incorporation of the SME products into Nokia’s products has caused problems in some cases. These companies have not created their own brand, and do not always own the intellectual property rights, which could be marketed or utilized together with other companies. This may complicate the future growth possibilities of the companies in question, and make the expansion of their customer bases difficult. We will come back to this issue in the next subsection. The co-operation clause set by Tekes for large companies came up in many interviews. The requirement has made an impact, as the following example shows. The starting point with Tekes has been that university co-operation and networking is a must … The fact that Tekes says we must create networks and maintain links to universities begins to be reason enough for Nokia to generally do so … It’s pushing us to remember to do it, because when times are tough it is easy to curl up in oneself. (R&D manager, Nokia)
On the other hand, in more than half of the Nokia projects at which interviews were conducted, co-operation would have taken place regardless of the cooperation clause. In these, it has often been a case of organizations already familiar with each other. The organizations had completed a number of projects together and the same configuration carried on to new projects as well. 6.3.2
Diffusion of Know-how to Universities
Nokia’s co-operation with universities in Finland has mainly focused on the universities specializing in technology and the natural sciences. Most cooperation takes place, as is depicted in Figure 6.4, with the Universities of
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Technology in Helsinki and Tampere, and with the University of Oulu. In addition to these, Nokia co-operates with, for example, the University of Technology in Lappeenranta and with the Universities of Helsinki and Jyväskylä. Nokia also has extensive co-operation with VTT (Technical Research Centre of Finland). In many cases, the co-operation between the partners has a long tradition. It worked well in Oulu then and it still works quite well, [the co-operation] we had with universities, Nokia, and a few other local companies. This tradition of research co-operation with the university is very long. (R&D manager, Nokia) Mobira purchased much outsourcing from universities already at the beginning of the 1980s. It was quite open, and since they did not have the resources, they had much of the work done by universities. (Professor, university/research institute)
Through co-operation know-how has spread to various parties. The exchange of information has been mutual, that is, in many projects the know-how has diffused from universities to Nokia and vice versa. The same concerns the partner companies. The following quotes from interviews describe the diffusion of know-how: The accumulation of knowledge in our organization has been very strong. In this project, almost all of our people are those who are doing postgraduate studies and aiming at a doctoral dissertation. New theories have been developed and new results have been achieved in different areas, thus knowledge in our organization has increased considerably. (Professor, university/research institute) From Nokia’s perspective, they [at Nokia] passed on such knowledge, which they had not created themselves but where their work had explored alternative solutions. In this way their competence was complemented. (Professor, university/research institute) This [project] reinforced on its part our conception of the fact that this university group is especially productive, and we can obtain this type of competence there. That way we had faith, when we later participated in similar projects, that it is worthwhile to get this sort of project done here. (R&D manager, Nokia) For several years the level of research in companies has been the same as in universities. It [the company research], however, focuses on quite short-term issues and concrete matters. Universities have a longer scope. There have been attempts to get them to match. That is one motivation for us researchers ... (Professor, university/research institute)
The latest theoretical knowledge has been passed on to Nokia and other companies through universities. The business sector has been able to provide practical applications, where theoretical knowledge and basic research have
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been utilized in business. In general, it seems that co-operation between universities and Nokia has functioned relatively well. However, the spreading of know-how and competence is not always uninhibited. Especially in the case of applications close to commercialization, the transfer of knowledge is carefully controlled. Some interviewees expressed doubts concerning the spread of knowhow even more widely, as the following example shows: The requirement by Tekes, that there have to be [in large company projects] small businesses involved has caused the result that small slices have been outsourced to smaller companies or universities. The networking requirement has kept this option [Tekes’ financing] open. But how much competence is transferred, that is probably quite little. (Professor, university/research institute)
A central distribution channel for know-how is recruitment. The most common way is that students move from universities to companies, and competence is transferred with them. Many of the interviewed company representatives stated the ability to recruit competent people in the future as an important motive for university co-operation. There has also been some transfer of personnel in the other direction. The following quotes exemplify the significance of recruitment: In this project, there has also been the kind of knowledge transfer that people from this project have moved to be employed by the financing organizations. Similarly it has been that people from the financing organizations have come for postgraduate studies working for us. (Professor, university/research institute) The development of universities is very important from the point of view of the companies, and at least we saw it as very important to be able to direct their research so that it would serve us best. And that the resources there would develop so that we would be able to recruit people from the universities in the future … We have recruited one person from this project from there [the university]. (R&D manager in a Nokia partner company)
What came up in many interviews is that representatives of universities and research institutes felt that they did almost all the work related to the projects. Financing organizations often take part in executive meetings but not in the actual substance of most of the projects. Many interviewees brought up the issue that business partners could play a more active role. The next quote describes these wishes: We would really greatly welcome more active company partners … That is the opportunity of the Tekes projects. That a company, which assigns a person there, who has the right competence, skill, background, commitment, time and who would stay on there. Not only become familiar with the material and come to the meetings prepared and so on, but would maybe go and talk to the people there and work on a paper together and participate. This is extremely rare. (Professor, university/research institute)
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In addition to the co-operation with universities and research institutes in Finland, Nokia co-operates with many universities abroad. Table 6.1 presents the most important universities with whom Nokia co-operates. Table 6.1
Nokia’s most important partner universities by country, 2001
Finland Helsinki University of Technology Tampere University of Technology University of Oulu Denmark Technical University of Denmark Aalborg University Germany University of Dortmund Aachen University Sweden Linköping University Royal Institute of Technology Japan University of Tokyo Tokyo Institute of Technology UK Imperial College Source:
University of Strathclyde University of Surrey United States Massachusetts Institute of Technology University of California, Berkeley Texas A&M University Stanford University China Beijing University of Posts and Telecommunications Tsinghua University Thailand Asian Institute of Technology Hungary Budapest University of Technology and Economics
Häikiö (2001)
In addition to these, Nokia also co-operates with other universities. Cooperation at different levels takes place with over 100 universities. Nokia’s wide network of activity poses a challenge for a small country such as Finland. Particularly from the small country perspective it is important that Nokia maintain its R&D activities in its home country. This is a crucial challenge for many Finnish universities and suppliers as well. A prerequisite for continuing the co-operation is that universities and suppliers are able to stay at the very forefront of technological development. It presents us too with a tough challenge, that we need to choose the right areas and be the world leader in them. Because Nokia is so big, it can take the world’s best from wherever in the world. (Professor, university/research institute) Nokia is a large and international and demanding customer. It requires competence from its own contractors, it demands high competence from universities and research
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institutes, and it sets the standards high. That way the research projects borne by universities are such that we, and our kind of smaller companies, are able to utilize them. (R&D manager in a Nokia partner company)
When examined more broadly, both company and university co-operation is based on the fact that each party feels they benefit from it. The main benefits to universities come from dissertations, academic publications and the accumulation of know-how. The latest theoretical knowledge is passed on to companies through the universities, while the business sector has been able to offer practical applications in which theoretical knowledge and basic research have been utilized in business. The views of the interviewees regarding the utilization of the results of cooperation and especially the division of intellectual property rights (IPR) are split in two. Some did not find IPR problematic while some felt that the biggest challenges of all were related to IPR. The following quotations describe these views: Then when those departure or IPR issues come up, they have been settled in the executive board. They have not caused any big difficulties, rather the opposite. But it requires that the one who participates in the project understands the rules and how the game is played. (Professor, university/research institute) The company concluded that this project was not to be continued. And certainly if the company as the financing party decides not to continue it, it’s of course entitled to do so. But what was sad was that originally it was thought that if they do not commercialize the product, then the university is left with the right to develop it further. Then we could develop something new based on the previous work. In that case we would be able to develop something new on the basis of work already done. What happened was that this right wasn’t granted. The end result was that now certain researchers can’t continue to write their doctoral dissertations, because the work they’ve done is based on the findings of that particular project. Now that the company’s sitting on the findings and not releasing them, the researchers can’t continue working on their dissertations. (Professor, university/research institute) This crisis, which is here in this IPR matter, is extremely serious … It can eat away the basis from this whole thing. (R&D manager, Nokia)
The interview quotes indicate that, both in companies and in universities/ research institutes, IPR-related matters are receiving serious attention. Within this study there was no opportunity to focus more deeply on questions relating to intellectual property. The subject is therefore left for further study. 6.3.3
Finland’s Reputation as a High-tech Country
The share of research and development expenditure of GDP has grown strongly in Finland over the past few decades. Since the beginning of the 1990s,
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relatively more research and development was conducted in Finland than in the EU on average (Figure 6.5). In the latter half of the 1990s Finland overtook the United States in R&D intensity. At the end of the decade, the share of research and development exceeded 3 per cent of GDP, which equals the level of R&D in Japan. Of all the countries focused on in this study, Sweden has invested the most in research and development. 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Source:
1993 1995 1997 1999 2000 2001e
⎫ Share ⎬ of Nokia ⎭
Finland
Sweden
USA
EU
Authors’ calculations.
Figure 6.5
R&D expenditures relative to GDP (%)
Finland’s high research and development intensity leans mostly on Nokia’s extensive R&D activity in Finland (Figure 6.5). If Nokia’s share were taken out of the figures, in 2001 Finland’s R&D spending would be about 2.3 per cent of GDP. Yet, even then Finland’s R&D intensity would be clearly above the average EU level. To summarize, we can conclude that more research and development takes place in Finland than in the EU countries on average, independent of whether Nokia is taken into account or not. Nokia’s R&D spending has increased strongly since the beginning of the 1990s. Although the company has increased its research and development abroad, R&D expenditures have also grown strongly in Finland. In 2001, the company’s R&D conducted in Finland accounted for approximately half of the total business sector R&D in Finland.
6.4
SUMMARY AND DISCUSSION
Our examinations suggest that Nokia plays a key role in the innovation system of the Finnish ICT cluster. In addition to Nokia’s own innovation activities, the company has an extensive co-operation network in Finland.
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The Significance of Tekes Funding
The share of Tekes funding of the total R&D expenditures of Nokia has varied over time. The MTI Technology Office funded an average of 7 per cent of Nokia’s R&D spending in the 1970s, 8 per cent in the 1980s and slightly below 3 per cent in the 1990s. In 2000 the respective figure was 0.3 per cent. However, it must be noted that by examining only the amounts of Tekes grants, it is not possible to form a complete picture of the significance of Tekes funding. We see that Tekes financing has had strategic and long-term influences. For example, the MTI Technology Office and Tekes financed the early development phases of Nokia’s digital call centre system. In the early years of Tekes, considerable amounts were invested in the development of GSM technology, software tools, and the protocol base at VTT. Another example relates to the deep recession in the 1990s. According to the book on Nokia’s history (Häikiö 2001), Tekes funding during the recession in the early 1990s especially supported the continuity of the operations at the Nokia Research Center. 6.4.2
Learning and the Quest for Innovation Play an Important Role
In addition to money flows such as public R&D funding and taxes, Nokia’s activities are reflected in the Finnish innovation system through education, diffusion of know-how, other companies’ R&D activities, and learning. Nokia has numerous links to organizations that influence the birth and utilization of innovations in both Finland and abroad. Its co-operation network includes other companies (producer-user relations and research co-operation) as well as research institutes and universities (research co-operation). In addition to the R&D co-operation in Finland, Nokia has numerous similar co-operation relationships with foreign companies and universities. Nokia was already involved in research co-operation with universities during the Nokia-Mobira times in the 1980s. Since then universities have conducted numerous co-operative projects concerning the development of mobile phones, networks and their software. Nokia’s success is at least partly a sign that the world’s top class technology has been developed in Finland. It seems that the co-operation between companies and universities/research institutes has functioned relatively well in Finland. The prerequisite for cooperation has been that both companies and universities have felt they benefit from the co-operation. Know-how and competence have been transferred between companies and universities, which has enabled learning for both parties. On the other hand, successful university co-operation and the current high level of competence do not provide guarantees for the future. Some interviewees brought up their concern for the current state of universities. According to them,
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funds are not directed to where they are needed. These views are evident in the following interview quotations: It would be a good message to truthfully bring out the kind of state our country’s now in and where we’re going, because this is a distressing situation. … And then the Ministry of Education states that there are no problems and universities decide themselves on the allocation of funds, as we all know, and we know the consequences of that. We have maybe five years in which to sustain and develop the competence that we have. But after that we won’t be much different from any other European state in this game. … So this is the current state of the Finnish innovation system. (Professor, university/research institute) What we are particularly concerned about is this deterioration of basic higher education. It is crucial that the [university] first and second courses are taught well. … And that is now partly deteriorating due to lack of funds and that is serious. (R&D manager, Nokia)
Nokia has had its influence on the fact that the number of university places in the ICT field has been increased significantly. The company has also played a role in educational planning at universities, and through that influenced the direction of education. By these means Nokia has been able to recruit highly qualified personnel, especially for tasks related to research and development. In addition to universities and research institutes, Nokia co-operates in research and development with other companies. The variety of partners is vast. The network includes component manufacturers, contract manufacturers, production automation manufacturers, software houses and even companies outside the ICT industry. As a result of the co-operation, know-how has flowed in both directions. Nokia has benefitted from partner companies by acquiring components of the latest technology, intermediate products, and software modules for its own end products. This has benefitted Nokia’s R&D activity and production, as well as enabled Nokia to focus on its own core areas. Also the innovation activities of Nokia’s partners have reaped benefits from the existence of Nokia. Nokia has offered applications for various companies’ products. Furthermore, Nokia has served as an international marketing channel for companies. In particular, small firms’ resources would not have sufficed for international operations had Nokia not worked at least partly as a marketing and distribution channel. Thus the products of many smaller companies are incorporated into Nokia’s products. Co-operation with both universities and companies has brought advantages, but problems have not always been avoidable. One issue that raises discussion concerns the utilization and ownership of the results of co-operation. These intellectual property rights (IPR) determine which party has the rights fully to utilize the results in its business. However, the IPR issue could not be thoroughly explored within the framework of this study.
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Success through Interaction
Generally speaking, public R&D funding aims at reaching a high pay-back ratio for the government or social utility for the entire national economy. Nokia has received public R&D funding in the early phases of some risky projects. A number of these projects have later proved to be very profitable. Herewith we estimate the pay-back ratio by formulating a simple mode of monetary flows between Nokia and the Finnish government (Figure 6.6). The figure presents the estimated monetary value of the payments between the Finnish public sector and Nokia during the period 1995–2000 (at 2000 prices). The public sector has offered a common infrastructure and educated personnel that Nokia has utilized. The company-specific monetary support has also been taken into account. On the other hand, Nokia has been a noticeable taxpaying institution and the company has supplied some grants to the Finnish, mostly publicly financed, universities, too. Public sector
Nokia
Universities Source: Authors’ calculations. Source of Statistics: ETLA, Ministry of Education, Nokia, Statistics Finland
Figure 6.6 Monetary value flows between Nokia and the public sector in Finland 1995–2000 (at 2000 prices) R&D grants from Tekes to Nokia totalled slightly below 80 million euros over the years 1995–2000. Over the same time period, Nokia paid corporate taxes of 2.9 billion euros. In addition, Nokia invested in the academic world by financing research and development projects as well as by donating equipment and software to universities. We estimate the total value of these investments
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to be about 18 million euros.2 Nokia’s employees have paid income taxes worth 1.4 billion euros over the years 1995–2000, and taxes on management options worth 1.2 billion euros. Over the same time period, Nokia has paid just below 1.2 billion euros in social security payments for its employees. Altogether, the income taxes, taxes on management options, and social security payments for the employees exceeded 3.8 billion euros over the years 1995–2000. Nokia has, as have all other companies, benefitted from free public services such as higher education. In addition, the companies’ personnel use and utilize free services, transfer payments and infrastructure built by the public sector. The division of these costs, and their calculation for a specific company is of considerable difficulty. Therefore the following calculations should be viewed as exemplifying. We calculate the replacement value of the education of Nokia’s Finnish workforce as the product of the costs of different qualifications and the number of Nokia Finnish personnel with the respective education.3 Calculated this way, the value of the education is 600 million euros. This depicts the amount of money that was required in 2000 to produce the respective level of qualifications. The value of public services and infrastructure directed to the employees of any company of Nokia’s size would be about 1.6 billion euros.4 Both this and the method used to calculate the accounting value of education should be considered as examples, as other methods exist as well. Overall, then, public sector initial R&D investments in the 1980s turned out to be a success for Nokia’s product development. Nokia has, however, paid back multiple times more in tax-type obligations to the public sector than it has received from the government in terms of direct monetary support or general infrastructural government spending. According to our simplified calculations, Nokia has benefitted directly in the amount of 2.3 billion euros during the years 1995–2000. In the same period, the Finnish public sector directly received 6.7 billion euros from the Nokia corporation. To summarize, we can say that the public sector has been involved in the financing of many of the basic technologies important to Nokia. Furthermore, Nokia’s own R&D and marketing investments have grown rapidly. At the same time, Nokia’s co-operation with other companies, universities and research institutes has made it possible for Nokia to focus on its own core competencies. It is probable that without the interaction of these parties Nokia’s know-how would not have realized the current level of returns. 6.4.4
Future
As a result of Nokia’s rapid growth, its position in the Finnish innovation system in the ICT cluster has been highlighted. The latest knowledge in the
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field has also accumulated in other Finnish companies, universities, and research institutes. However, Nokia’s co-operation with other Finnish partners depends on their ability to stay ahead of development in the future also. The Finnish universities compete for the top positions with universities in the rest of the world. Currently Nokia co-operates with over 100 universities around the world, and it can choose its partners. Nokia’s own R&D activity will become more and more global in the future. It is likely that the company’s research and development activities will grow faster abroad than in Finland.
NOTES * This article is strongly based on Ali-Yrkkö & Hermans (2002) 1. There were 42 interviews conducted, of which 19 were with employees of Nokia, 13 with representatives of research institutes or universities, and ten with people employed by companies co-operating with Nokia in R&D. All of the interviewees at Nokia were involved in R&D activities. The interviewees from the universities, research institutes and Nokia’s partner companies had been part of R&D projects with Nokia. The interviews were conducted in December 2001 and January–March 2002. To protect the anonymity of the interviewees, their identities are not published. However, the interviewees being quoted directly are divided into three groups : – R&D manager, Nokia; – R&D manager in a Nokia partner company; – Professor, university/research institute. 2. The estimate is based on the research financing paid by Nokia to Tekes’ ETX and TLX programmes (total of over 50 million FIM [over 8.4 million EUR] over the period 1997–2000). An estimate of research financing in the years 1995 and 1996 is added to this figure, plus an estimate of the value of equipment and software donated by Nokia. 3. The educational distribution of Nokia’s Finnish workforce is estimated as follows: university degree 36 per cent, polytechnic university degree 30 per cent, degree from institute of further education (such as commercial and technical colleges) or vocational school 30 per cent, rest 4 per cent. The costs of education are from figures in the Ministry of Education’s KOTA and AMKOTA databases on the number of graduates in 1995–2000 and the costs of budget-financed activity in 2000. The calculation includes only qualifications higher than basic education, thus costs of basic education are not included. 4. The value of public spending utilized by Nokia’s personnel (GNokia) is directed to Nokia’s employees so that public consumption and investment expenditures as well as transfer payments without pension and employment expenditures (GTotal) over the years 1995–2000 are divided by the number of work-aged people (LWorkAge), which has then been multiplied by the number of Nokia employees in Finland (LNokiaFin). In other words:
G Nokia =
GTotal LWorkAge
⋅ L NokiaFin
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REFERENCES Ali-Yrkkö, Jyrki (2001). Nokia’s Network – Gaining Competitiveness from Cooperation, ETLA B 174, Helsinki: Taloustieto Oy. Ali-Yrkkö, Jyrki & Raine Hermans (2002), Nokia in the Finnish Innovation System, ETLA Discussion paper No. 811. Ali-Yrkkö, Jyrki, Laura Paija, Catherine Reilly and Pekka Ylä-Anttila (1999), Nokia – A Big Company in a Small Country, ETLA B 162, Helsinki: Taloustieto Oy. Häikiö, Martti (1998), (in Finnish) Alkuräjähdys. Radiolinja ja Suomen matkapuhelintoiminta 1988–1998, Helsinki: Edita. Häikiö, Martti (2001), (in Finnish) Nokia Oyj:n historia, Helsinki: Edita. Paija, Laura (ed.) (2001), Finnish ICT Cluster in the Digital Economy, Helsinki: Taloustieto.
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7. The flexible production model in Finnish companies: Trends in production management, work organization and employment relations Tuomo Alasoini 7.1
INTRODUCTION
This chapter examines the introduction and dissemination of the new flexible production model in Finland, from the perspective of companies and the national innovation system. It uses a conceptual framework developed by Bélanger et al. (2002), in which ongoing structural change in business is examined in terms of a transition from a Fordist production model to a new production model through three interrelated dimensions: production management, work organization and employment relations. The concept ‘production model’ is used here as a theoretical abstraction, which may include a wide range of country- and sector-specific variations. In highlighting the special features of trends in Finland, the chapter also examines them in a wider comparative perspective.
7.2
FROM A FORDIST MODEL TO A NEW MODEL – HOW TO CONCEPTUALIZE, MEASURE AND ASSESS CHANGE?
The post-war era up to the early 1970s could be described as the golden age of the Fordist production model. The year 1973 marks the end of this golden age, being the year when the oil crisis put an end to the period of rapid economic growth and accelerating productivity that the advanced industrial countries had enjoyed since the war. The social legitimacy of the Fordist model was based on beneficial interaction between mass production and mass consumption. A powerful accumulation of capital made it possible to modernize the production process, thus generating 128
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a rapid rise in productivity that was acceptable to employees. As a consequence, employees began to focus on the struggle for purchasing power (tending not to strive to influence matters related to management, production or work organization). This boosted demand for consumer goods and further increased the production of capital goods, which enabled companies to maintain their profitability; this in turn caused a further powerful accumulation of capital, and so on. The government contributed significantly to maintaining this ‘virtuous circle’. Government grants and services promoted the renewal of production processes, while income transfers supported the emergence of a consumption norm that guaranteed continuing purchasing power for employees. The breakdown of the self-perpetuating ‘virtuous circle’ of mass production and mass consumption has been explained by changes in the competitive environment, technological and organizational innovations, and growing discontent among employees (Bélanger et al. 2002, pp. 28–30; Elam 1990). As a consequence, companies have actively striven to dissociate themselves from the principles of the Fordist model. In production management, this has meant greater flexibility in production, the standardization of processes, and the dismantling of vertical integration and the conversion of value chains into networks consisting of several companies. The main forces for change have been the increasingly individual demands of clients, the emergence of new management approaches, and the rapid advances in information and communications technology (ICT). In the area of work organization, companies have tried to move towards flatter and leaner structures, to dismantle the detailed division of labour and to deploy the skills of the workforce more effectively through measures such as self-management, multi-skilling, team and project work, job rotation, and job enlargement. Where employment relations are concerned, companies have been pursuing more flexible terms of employment and stronger employee commitment. Companies have been searching for greater leeway in issues such as wages, working hours, job security and job assignments, either by attempting to influence the content of collective agreements or by striving to influence individual employment contracts in ways that bypass the trade unions. The typical means used by companies in striving to boost employee commitment include various forms of direct participation, and pay systems tied to output and quality. How consistently and comprehensively companies have tried to dissociate themselves from the Fordist model, what forms their strategies for change have taken, and what benefits they have obtained in this way vary greatly from one company to the next. Strategies for change involve a variety of tensions and actual conflicts, both within each of the three dimensions discussed and between them. Tensions and conflicts also emerge because the Fordist model has been tied to the institutional structures of society by a variety of means, including the education, funding and labour market systems (Bélanger et al. 2002, pp. 56–68).
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Employment relations, specifically, are an area where a company’s scope for operation is greatly dependent on the extent of and forms taken by government and labour market organization regulation. There are no generally accepted ways of measuring how far companies or countries have moved towards the new production model. Furthermore, definitions and measurement methods on issues such as production networking or new forms of work organization may vary a great deal from one study to another. In any case, individual measures are problematic if only because the various dimensions of a production model make up a complex system of interdependent units. In this chapter, we are prisoners of the existing empirical material. There is no reliable material available on the extent to which many of the characteristics of the new model have been introduced in Finland. Even in cases in which such data are available, there is often limited potential for comparisons both over periods of time and with other countries. There is even less material on the effects of the new model on the companies involved. For all these reasons, we should exercise caution in drawing conclusions about the introduction and spread of the flexible production model in Finland. On the basis of the framework of Bélanger et al. (2002) and the limitations outlined above, this chapter begins with an overview of changes in production management, viewed in terms of network co-operation between companies. The development of work organizations will be examined through teamwork and employee potential for influence and development. Changes in employment relations are examined in terms of changes in bargaining and participation systems. Finally, the adoption and spread of the new model in Finland is assessed from the perspective of the national innovation system.
7.3
PRODUCTION MANAGEMENT – NETWORK CO-OPERATION BETWEEN COMPANIES
The globalization of competition, accelerating cycles of innovation and rapid advances in ICT are driving companies to focus on their core competencies. This, in turn, is leading to a growing need for them to pool their economic resources and expertise. Production co-operation between companies and growing co-operation in research and development concerning both products and production are some of the key changes in the transition from a Fordist model to the new flexible production model. It is, however, difficult to quantify these forms of co-operation as they are so different. Production co-operation between companies can exist on many levels (McHugh et al. 1995). On the lowest level (1), two companies combine forces on a one-off basis to create a product or product range. In this case, their co-
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operation only extends to certain operative functions and is aimed at financial gain in the short term. Co-operation can also be more long-term (2) in the sense that a company might take another company’s wishes, expectations or demands into account in developing its own operations. This co-operation is based on a longer-term agreement that assigns duties to the two parties involved in the development of their own operations, with the ultimate aim of bringing down total costs. More advanced co-operation (3) is achieved when companies are linked together directly through each other’s logistical or product planning, and even product development. Even more advanced co-operation (4) is involved when the companies’ strategic planning is also linked. It is then justified to say that the companies involved are functioning as a business network. Close, long-term co-operation also involves potential problems, such as the danger of ‘lock-ins’, which may make it more difficult even to look for alternatives, and also make it harder for the companies to adapt to rapid changes in their environment (Schienstock 1999). An uneven power balance between the companies may also create dependency between them, and thus produce a disincentive to more open co-operation. For this reason, some experts have in fact issued gloomy forecasts for low-tech SMEs, in particular, as the new production model spreads (Harrison 1994; Semlinger 1992). A company’s interest in seeking competitive advantage by getting involved in production co-operation is influenced by several factors. Primarily, they relate to the pace of change in its environment and how capital-intensive its operations are. The faster and more unpredictable the changes in the environment are, the bigger the potential benefits of co-operation. In such a situation, companies are more reluctant to make investments that will enable them to cover a large part of the overall value chain. It is more attractive to tap into expertise and resources which other companies already possess while concentrating on your own core competence, instead of having to acquire new types of expertise by recruiting more labour or tying up more capital in production technology. An industrial company in a rapidly developing business sector – like Nokia, for instance – can transfer the actual manufacturing process entirely to a specialist contract manufacturer, while itself focusing on product development, marketing and brand management (Ali-Yrkkö et al. 2000). The second important factor in a company’s willingness to network is how capitalintensive its operations are. A company’s interest in networking diminishes with greater capital intensity, because the significance of a high capacity utilization rate as a competitive factor grows. Until the 1980s, the metal and engineering industry took the lead in trying out new production management methods in Finland. In recent years, however, this leading position has clearly been taken over by the electronics industry – or, in a wider sense, the entire ICT cluster – in the wake of Nokia. The exceptional advances made by the ICT cluster compared with other sectors is
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clearly evidenced in its productivity figures: in the 1990s, when labour productivity grew at an average rate of 3 per cent per year in Finland, and 7 per cent per year in Finnish industry, the corresponding figure for the electrical and electronics industry was 15 per cent and, within it, as much as 25 per cent among manufacturers of telecommunications equipment (Ali-Yrkkö et al. 2000; McGuckin and van Ark 2002). The growth figures for productivity in the country as a whole, which are good as such, actually conceal the fact that in many sectors the 1990s were a time of surprisingly slow progress. This indicates problems with the introduction of new technologies and a dearth of innovations in management and work organization. Consequently, in light of productivity figures, the dynamic advances of the ICT cluster remained a unique phenomenon in Finland in the 1990s. A survey by the Confederation of Finnish Industry and Employers (2001), covering 363 companies, is one of the few studies permitting more detailed assessment of the extent of production co-operation between companies, and trends in this area in Finland. Although the sampling is relatively small, the industrial companies represented account for almost 40 per cent of the total industrial workforce and 60 per cent of turnover. The study confirms that cooperation is most widespread in the electrical and electronics industries. Some 88 per cent of all the principal suppliers in the metal and engineering sector and electrical and electronics sector said they were involved in production cooperation, compared with an average of only 71 per cent for industry in general. The lowest incidence of co-operation was found in capital-intensive sectors such as the wood-processing and chemicals industries, where the percentages were 54 and 46, respectively. The data were based on companies’ own information on whether they were involved in co-operation in the manufacture of end products or not. The study also focused on the depth of co-operation and how it had developed. It showed that partnership, that is, co-operation between companies on a longer-term basis than an annual agreement, became far more common in Finland in the 1990s. In 2000, partnership was estimated to account for 38 per cent of all co-operation agreements between companies, compared with only 18 per cent in 1993 (Table 7.1). According to the survey, principal suppliers, systems suppliers and parts suppliers are all interested in expanding co-operation still further. The study showed that companies involved in co-operation had grown faster than other companies from 1998 to 2000, and they also tended to assess their prospects for growth with greater confidence. There were, however, no differences in profitability. The study tentatively suggested that either the companies involved in co-operation focused on boosting their market share or company size, or the benefits of networking might take time to have an effect.
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Table 7.1 Different types of corporate co-operation agreements in Finnish industry (%) Type
1993
1996
2000
Partnership (strategic) Annual agreement Project-based agreement One-time agreement Total
18 47 21 14 100
24 44 20 12 100
38 33 16 12 100
Source:
Confederation of Finnish Industry and Employers (2001, p. 24)
Production co-operation is a new phenomenon in Finland. Its spread is connected with the increased awareness of process management in the early 1990s. This, combined with ever higher demand for tailored customer solutions and shorter delivery times, and the new opportunities created by ICT advances, shifted the focus of corporate production management development from technological and organizational solutions involving the companies’ own production to efforts to streamline the entire order-to-delivery chain (Jahnukainen and Vepsäläinen 1998). In terms of the organization of work and production, this brought about three important changes: (1) The core companies in the value chains concentrated more on their own core competence, which meant that they needed more permanent forms of co-operation, across corporate boundaries, with the companies dealing with outsourced operations and other strategic stages of the value chain. (2) Companies needed forms of work that demanded more intensive co-operation and crossed traditional boundaries between functions, leading to obscuring the boundaries between traditional occupations and personnel groups. (3) In order to boost flexibility and ensure rapid response capacity, new forms of teamwork were needed, giving production workers more power and responsibility for decisions on a day-today basis. The Confederation of Finnish Industry and Employers survey provides some information on the first of these three changes, while the other two will be examined in what follows. The study also indicates that companies in Finland have a very positive attitude toward intensified production co-operation. In such a small country, however, one common practical problem is the difficulty of finding suitable co-operation partners. For example, the number of dynamic medium-sized companies in Finland is small. This means that the number of Finnish SMEs which are potential systems suppliers, or could rapidly become systems suppliers, is very limited; functioning as a systems supplier and being willing to grow in partnership with a major international corporation means that an
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SME must be sufficiently large and, above all, willing to take even considerable risks and able to constantly develop its operations (Lamming 1993). In the Finnish electronics industry, for instance, it is estimated that the total number of first-tier suppliers available over the next few years will only be some 40 (Paija and Ylä-Anttila 1998, p. 110). At best, a solid partnership with a major international corporation offers a systems supplier the opportunity for a valuable learning process. The systems supplier can then pass on what it learns to its own parts suppliers. Systems suppliers can play a strategically important role in conveying information to a wide circle of other companies, concerning anything from product and process technology to management and work organization (Hines 1994). The lack of systems supplier resources may thus be a very serious weakness affecting the entire national innovation system. The Confederation of Finnish Industry and Employers survey showed, perhaps somewhat surprisingly, that systems suppliers in particular, but also parts suppliers, had a more positive view of the advantages of production cooperation than principal suppliers. Far-reaching conclusions on the long-term effects of co-operation should, however, be approached with caution, as the period covered by the survey was a time of rapid growth in Finnish industry. This created unusually favourable conditions for ‘win-win’ co-operation between companies. Even the early 2000s and the economic slowdown it brought demonstrate that a big globally operating company such as Nokia has weathered the recession much better than many of its main Finnish suppliers.
7.4
WORK ORGANIZATION – TEAMWORK AND EMPLOYEES’ OPPORTUNITIES FOR INFLUENCE AND DEVELOPMENT
The spread of teamwork and a general devolution of responsibility are the main features of the flexible production model in terms of work organization. As implied before, the spread of teamwork and network co-operation were part of the same process of change in Finnish business that was linked with the breakthrough of process management. Problems involved in examining the spread of teamwork include the fact that there is no single, generally accepted definition, and that methods for collecting information vary from one study to the next. Even if it were possible to create a generally accepted definition of teamwork, it could still take a number of forms, including differences in the composition of teams, their internal division of labour, leadership, decision-making power and so on. These differences may derive from widely divergent management ideologies or knowledge bases (EPOC Research Group 1997). In Finnish studies, data on
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teamwork are based simply on subjective evaluation by the respondents themselves. These studies also make no distinctions between different forms of teamwork. The annual Working Life Barometer of the Finnish Ministry of Labour has been monitoring how common it is to work in groups (teams, cells, project groups). The barometer is drawn up annually, based on computer-aided telephone interviews with about 1000 wage-earners. The data are representative of all Finnish wage-earners. In 2001, 76 per cent of respondents said employees worked in groups either ‘mainly’ or ‘partially’ in their workplace. The percentage of ‘mainly’ answers had gone up from 34 to 44 per cent in industry and from 22 to 30 per cent in the private service sector between 1995 and 2001 (Ylöstalo 2002, pp. 68–9). Other studies are comparable to the Barometer in terms of the spread of teamwork. Statistics Finland’s 1997 Quality of Work Life Survey supports the findings of the Barometer, showing that teamwork is used in a clear majority of Finnish workplaces. In the Survey, which is based on face-to-face interviews with 2979 wage-earners, 74 per cent of respondents said teamwork was used at their workplace (Lehto and Sutela 1999, pp. 18–19). A postal questionnaire on information work, carried out as part of a study by the University of Tampere in 2000, with 1775 respondents, gives 81 per cent as the corresponding figure (Blom et al. 2001, p. 177). The Ministry of Labour’s Flexible Enterprise study of 1996 differs from the above-mentioned studies in that the respondents in the combined postal questionnaire and telephone interview were management representatives, and it only targeted enterprises. The research material consisted of 1384 privatesector workplaces with at least 10 employees. In this study, 16 per cent of the workplaces had introduced teams, cells, job rotation or quality circles ‘extensively’ and 33 per cent ‘quite a lot’. Workplaces using teamwork accounted for 53 per cent (Antila and Ylöstalo 1999, pp. 59 and 87). The difference from the other studies mentioned above may be a result of the different respondent group, differences in how the questions were worded, or the fact that the sample in this study focused more on small workplaces, where teamwork is rarer. According to the University of Tampere study on information work, the telecommunications sector had the biggest number of respondents (61 per cent) who felt that teamwork had become more common between 1998 and 2000. The lowest number was in the transportation sector (36 per cent). Industry (54 per cent) came close to the average for Finland as a whole (53 per cent). During this time, the telecommunications sector had also introduced more performancebased supplements or wages than other sectors, jobs had been outsourced more and supervisory posts had been cut (Blom et al. 2001, p. 118). The study on information work had included building, mining and energy supply under ‘industry’. This is problematic in terms of examining the spread
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of the flexible production model, because such a widely defined industrial sector includes businesses that are widely different in their dynamic of change. A study by the Helsinki University of Technology in 2000, which charted quality perceptions in five sectors (the textile, furniture, metal and engineering and electronics, building, and hospitality and leisure-time industries) based on 1060 respondents (management, white-collar and blue-collar) showed that the use of quality tools varied considerably between sectors. The metal and engineering and electronics industry came first in terms of all the seven practices included in the study. These were teamwork, continuous improvement, balanced scorecard, statistical quality-control methods, problem-solving methods, qualityaward criteria and the ISO 9000 standard (Tuominen et al. 2000). The findings thus strongly indicate that the ICT cluster is also leading the way in Finland in work organization development and that, in the industrial sector, the metal and engineering and electronics industry is ahead of other branches. If the results of the Quality of Work Life Survey and the 2001 Working Life Barometer are combined, we can draw up a time series of changes in employee perception of their opportunities to influence their own work (Table 7.2). The general trend is for a growth in opportunities, especially in relation to the content of tasks. The biggest exception, meanwhile, is the pace of work, where opportunities for influence were still growing in the 1980s, but have since fallen appreciably. The material available does not allow for more detailed research on whether the changes are connected with the increasing prevalence of teamwork, or with the general tendency for work organizations to become flatter, leaner and more customer-oriented. Table 7.2 Opportunities for influencing one’s own work in Finland (%) (proportion of those who can influence ‘a lot’ or ‘quite a lot’) Aspect Order in which tasks are done Working methods Content of tasks Pace of work Division of tasks between employees Choice of working partner Equipment purchases Source:
1984
1990
1997
2001
68 58 25 59 25 12 20
67 63 37 64 29 18 21
69 65 40 57 31 19 23
n/a n/a 42 48 30 n/a n/a
Combined from Lehto and Sutela (1999, p. 25) and Ylöstalo (2002, p. 126)
Though the findings concerning employee perception of their opportunities to influence their own work are to some extent contradictory, employees still
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felt that their opportunities for self-development at work had consistently improved over the past few years. The percentage of respondents in the Quality of Work Life Survey who felt their potential for development was good went up from 28 per cent in 1984 to 32 per cent in 1990 and 37 per cent in 1997 (Lehto and Sutela 1999, pp. 20–1). The Flexible Enterprise study mentioned above was part of the Nordflex project, which provided a means of comparing work organization changes in Denmark, Finland, Norway and Sweden. The research on individual countries is not fully comparable in all aspects, but it does make it possible to compare the spread of teamwork and job rotation, and employee opportunities to influence their work in the different countries. The figures in Table 7.3 are based on responses from workplace management. The material was collected in the four countries involved between 1995 and 1997. Table 7.3 Delegation of responsibility, teamwork and job rotation in the Nordic countries (%) (proportion of workplaces with 50 employees or more which responded positively) Aspect
Denmark Finland Norway Sweden
Daily planning of their own work by individual employees Weekly planning of their own work by individual employees Employees working in teams More than 50% of employees working in teams Employees with formal job rotation More than 50% of employees with formal job rotation
62
40
20
57/88*
35 75
18 74
10 69
24/71* 91
10 50
30 81
na 40
58 65
6
20
na
24
* The first figure refers to direct production tasks and the second to other activities. Source:
NUTEK (1999), figures collected from different tables.
According to Table 7.3, Sweden is ahead of the other Nordic countries in terms of teamwork and decentralized decision-making, while Norway is lagging behind. Formal job rotation is very widespread in Finland compared with the other Nordic countries. Teamwork appears to be more widespread in Finland than in Denmark and Norway, but decision-making has not been delegated to employees to the same extent as it has in Denmark, not to mention Sweden. A more detailed comparison with Sweden shows that out of 11 aspects of work, Finnish employees had more responsibility only in the case of two: quality control and follow-up of results (NUTEK 1999, Appendix 3).
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It seems that teamwork is less likely to include delegation of responsibility in Finland than in Sweden and Denmark. The data also strongly indicate that organizational changes have been implemented in a less participatory way in Finland. Finnish managers are less likely than their Danish and especially Swedish colleagues to believe that the attitudes of employees and trade unions have had a positive effect on the implementation of organizational change. For instance, a majority (69 per cent) of Swedish executives believe that the trade unions have exercised a positive effect, while only 3 per cent of their Finnish counterparts share this opinion; 75 per cent feel it makes no difference. Comparison also shows that staff in non-executive positions took an active part in restructuring more often in Sweden than in Finland (NUTEK 1999, pp. 108–12). In conclusion, it appears that Finnish companies actively strove to improve the flexibility of their work organization in the 1990s, but that this was motivated to a striking degree by the employers. The improved flexibility involved extensive employee participation or delegation of responsibility to a lesser degree than in Sweden. There may be a number of explanations for this. It is possible that the consent of employees was ‘bought’ in the traditional Fordist manner through pay increases; trade unions in Finland have always taken a strong stand on distributive issues and the exertion of influence directly through the political machinery, and have tended to approve of technological and, to a great extent, organizational changes in the workplace as ‘necessary’ for the modernization of production processes (Koistinen and Lilja 1988; Lilja 1998). The agreement of employees may also have been secured by companies offering their employees good opportunities for improving their skills; in Finland, the percentage of workplaces that had skills development plans was higher than in Sweden and Denmark (NUTEK 1999, pp. 65–6). It could also be that there is generally a stronger belief in experts, authorities and hierarchies in Finland than in the other Nordic countries, which have a stronger tradition of participatory democracy in the workplace. Furthermore, it is possible that Finland’s dismal economic situation and record unemployment gave corporate executives more of a free hand to reorganize in the 1990s, while the situation in the other Nordic countries was different. In Finland at this time, companies’ efforts to boost their competitiveness by overhauling production processes and work organization also had an exceptional degree of social legitimacy.
7.5
EMPLOYMENT RELATIONS – CHANGES IN BARGAINING AND PARTICIPATION SYSTEMS
As stated above, companies making the transition from Fordist to flexible production have worked to achieve more room for manoeuvre in their terms of employment either within collective agreements or by influencing the content
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of individual employment contracts in ways which bypass the trade unions. In Finland, companies have largely followed the former strategy. From 1968 onwards, collective agreements in Finland have been generally based on a centralized incomes policy. In this system the central employers’ organizations and trade union confederations in both the private and the public sector try to find common ground on which to reach sectoral collective agreements. If they manage to reach a central skeleton agreement, sectoral collective agreements are signed in accordance with it. The central agreement is not legally binding, however, and individual unions can diverge from it. When necessary, the government has offered economic, educational and social policy reforms to encourage the parties to reach agreement. Between 1968 and 2002, there was failure only seven times (in 1973, 1980, 1983, 1988, 1993, 1995 and 1999) in reaching a one- or two-year central agreement. In terms of the relative weight of different bargaining levels (intersectoral, sectoral, company), the Finnish system is one of the most centralized in the EU. The main reasons why this centralized system has survived in Finland for more than 30 years are the high union density (about 80 per cent), the positive effects of incomes policy on economic development and welfare, and last but not least, an ideology of national consensus deeply rooted in Finnish society. However, none of these factors can be taken for granted in the future. Trade union membership among young people under 25 has, for instance, fallen sharply in recent years and in many growth industries in the private service sector, union density is well below average (Blom et al. 2001, pp. 120–1; Ylöstalo 2002, pp. 183–4). Though the intersectoral and sectoral level are still the most important levels of collective bargaining in Finland, we can talk of a trend towards ‘centralized decentralization’ (Lilja 1998), the main characteristic of which is that local (plant- or enterprise-level) bargaining gains importance within an institutional framework regulated by the sectoral collective agreements. An important milestone was passed in 1993, when efforts to sign a central agreement failed in the middle of deep economic recession and the subsequent union-level round of negotiations led to sectoral collective agreements, many of which greatly broadened opportunities for local bargaining. Local bargaining has gained ground in Finland mainly on the initiative of the employers, as a response to market demands for greater productivity, quality, customization and flexibility. A survey by the University of Turku, including data on 918 Finnish workplaces, shows that the percentage of companies with five employees or more which had signed local agreements with employees on at least some issues increased from 61 per cent in 1992 to 91 per cent in 1998 (Uhmavaara et. al. 2000, pp. 27–9). This number also contains local agreements through the co-determination procedure, and local agreements on changes in terms of employment with some groups of
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employees or even individual employees. The main hindrance to further expansion in the scale of local bargaining is no longer the legislation, the provisions of intersectoral or sectoral agreements, or other structural or institutional factors, but low-trust industrial relations and an undeveloped ‘bargaining culture’ at the enterprise or plant level. The most common issues on the local bargaining agenda have been working hours and pay. The spread of local bargaining has contributed to the accelerated pace of technological and organizational change by making it easier to agree on changes in pay, working hours, job content, and so on in enterprises. At the company level, there is a strong positive association between the scale of local bargaining and new work organization practices (Uhmavaara et al. 2000, pp. 128–45). It is no coincidence that the metal sector, which was a forerunner in the introduction of new work organization practices in Finland, has played the same role in widening the scope for local-level agreements, too (electronics manufacturers such as Nokia are covered by the same collective agreement). The key agents in local bargaining are company or plant managers and chief shop stewards. The shop steward system was officially established in the 1940s under general agreements drawn up by the central labour market organizations. The formal authority of shop stewards was strengthened in the 1960s and 1970s as more employees joined trade unions and new general agreements were signed between the social partners. Compared with many other European countries, shop stewards and the comparable staff representatives in Finland have a strong position that is also guaranteed by labour legislation, while bodies such as works councils have never gained a significant foothold. According to the survey by the University of Turku, shop stewards are in most cases the key bargaining agents acting for employees, but in one-fifth of all cases local agreements were signed by work groups, teams, employee groups or the whole staff and in another fifth by individual employees (Uhmavaara et al. 2000, pp. 35–6). Employers see the effects of local bargaining more positively than representatives of the personnel, and 78 per cent of employers are ready to further broaden its scope. The majority of employee representatives, on the other hand, are satisfied with the current opportunities for local bargaining (Uhmavaara et al. 2000, pp. 48–51). The difference is probably due to the fact that employers have played a more active role in putting issues onto the bargaining agenda. Many employee representatives feel that they do not have an equal standing with the employers’ representatives, because they lack relevant information on the conditions of the company or know less about legislative and contractual details. Lilja (1998, pp. 182–4) uses the concept ‘competence trap’ to mean a situation in which the unions’ internal organization and the specialized experience of their officials are not well suited to handling issues related to work organization, skills or management, and the unions therefore often have little chance to support chief shop stewards when these issues are negotiated in enterprises.
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The ‘centralized decentralization’ of the Finnish bargaining system has boosted companies’ potential for renewing their production management and work organization. In this area, too, the pioneer was the metal and engineering and electronics industry. The position of trade unions and shop stewards has remained strong, at least formally, in bargaining on traditional distributive issues such as wages or working hours in connection with change. In future, this will require continued high union density and also more expertise among trade unions and shop stewards concerning issues involving work organization, vocational skills and management. Meanwhile, the increased prevalence of teamwork and various development or project groups offer employees new channels for exerting influence over their own employment terms. Whether this will happen at the expense of the traditional bargaining system and representational participation systems, or in a way that supplements these systems, will depend largely on the trade unions’ ability to deal with matters outside traditional distributive issues.
7.6
THE NEW PRODUCTION MODEL AND THE NATIONAL INNOVATION SYSTEM
According to Lundvall and Tomlinson (2002), human resource development and the organization of learning processes in companies and networks has so far been a somewhat neglected area in studies of national innovation systems. This section offers some observations on the introduction and spread of the new production model in Finland, specifically from the point of view of the national innovation system. Although economic trends in Finland in the last few years are often described as a ‘success story’, a look at the three dimensions of the new production model also reveals some factors that pose a threat to continuing success. From the point of view of production management, there are three such factors in particular: (1) The growth in productivity has been very uneven between different sectors. Growth has been rapid in the ICT cluster, but in many other sectors such as service production, specifically, growth has been surprisingly slow. It will become increasingly important to secure good productivity growth in other sectors, too, if we are to keep the Finnish success story going, because the labour supply will begin to fall rapidly as the population ages. This change will be particularly drastic in Finland. A rapid growth in productivity will be needed to compensate for problems arising from labour shortages, which may slow economic growth. (2) The number of dynamic medium-sized companies in Finland is small. This means that there is a risk that only few companies might attain the position of systems supplier. Such companies are, however,
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much needed in networked production as an information link between major international corporations and small parts supplier companies. (3) Production co-operation between companies has expanded in Finland in recent years, boosted by economic growth. Only time will tell how deeply rooted the partnership approach has become in these companies, and what will happen in an economic slowdown. Will the companies stick together through hard times, too, or will they then revert to traditional short-term agreements between companies, designed mainly to achieve immediate cost-benefits? Finnish companies have introduced teamwork extensively and provided staff training in connection with the introduction of new forms of work organization. There are data available on the extent to which teamwork is used, but information on how the new forms of work organization have furthered employee opportunities for learning and development at work is harder to come by. Nevertheless, it is the latter issue that is essential for the national innovation system, as demonstrated by Lundvall and Tomlinson (2002). The results of the Nordflex project (NUTEK 1999) show that the role of employees in the introduction of changes was more modest in Finland, and that delegation, too, has not been carried out in Finland on the same scale as in, say, Sweden. This could be due to a number of factors, as outlined earlier in this chapter. However, delegation of responsibility for planning and development to autonomous teams can, at its best, be a powerful force that promotes learning and innovation in a company. In an insecure, rapidly changing environment, traditional training in the form of courses is in danger of losing its effectiveness compared with the learning that goes on within team-based organizations. Integrating work and learning rather than seeing them as two separate functions taking place in separate arenas is one of the hallmarks of ‘learning organizations’ and ‘high performance work systems’ (Ashton and Sung 2002; Senge 1990). The ‘centrally decentralized’ employment relations system is unlikely to place any major institutional obstacles in the way of corporate improvements to production management and work organization today. Low-trust industrial relations are a much bigger obstacle to the full exercise of the potential for company-level agreement. This is because the parties involved can only make such agreements when both are prepared to do so; otherwise the nationwide sectoral agreements will automatically apply. This means that local bargaining has made the most progress in Finland in companies with good bargaining positions between management and employees. In practice, the prevalence of local agreements on the workplace level shows a positive correlation with employee bargaining power (Uhmavaara et al. 2000). The ‘centralized decentralization’ of the bargaining system contains an incentive for employers to develop trust-boosting forms of employee participation that make it possible to reach agreements on the company level. The corresponding incentive for the trade unions is to strive to maintain enough bargaining power through high
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union density and also through expertise in new areas such as work organization, vocational skills and management practices. Otherwise, companies will soon no longer need a mechanism to enable local bargaining, but will instead begin to seek room for manoeuvre in employment relations increasingly through contracts with individual teams and employees, bypassing the trade unions. This might have far-reaching consequences not only for the entire Finnish employment relations system, but also for the consensual innovation policy climate. It might well undermine the willingness of employees and trade unions to support future changes in corporate production management and work organization, thereby slowing the innovation process in the workplace.
REFERENCES Ali-Yrkkö, Jyrki, Laura Paija, Catherine Reilly and Pekka Ylä-Anttila (2000), Nokia – A Big Company in a Small Country, Helsinki: ETLA. Antila, Juha and Pekka Ylöstalo (1999), Functional Flexibility and Workplace Success in Finland, Helsinki: Finnish Ministry of Labour. Ashton, David N. and Johnny Sung (2002), Supporting Workplace Learning for High Performance Working, Geneva: International Labour Office. Bélanger, Jacques, Anthony Giles and Gregor Murray (2002), ‘Towards a New Production Model: Potentials, Tensions and Contradictions’, in Gregor Murray, Jacques Bélanger, Anthony Giles and Paul-André Lapointe (eds), Work and Employment Relations in the High-Performance Workplace, London and New York: Continuum, pp. 15–71. Blom, Raimo, Harri Melin and Pasi Pyöriä (2001), Tietotyö ja työelämän muutos: palkkatyön arki tietoyhteiskunnassa, Helsinki: Gaudeamus. Confederation of Finnish Industry and Employers (2001), Kohti strategisia yritysverkostoja, Helsinki: Confederation of Finnish Industry and Employers. Elam, M.J. (1990), ‘Puzzling Out the Post-Fordist Debate: Technology, Markets and Institutions’, Economic and Industrial Democracy, 11 (1), 9–37. EPOC Research Group (1997), New Forms of Work Organisation: Can Europe Realise its Potential?, Luxembourg: Office for Official Publications of the European Communities. Harrison, Bennett (1994), Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility, New York: Basic Books. Hines, Peter (1994), Creating World Class Suppliers: Unlocking Mutual Competitive Advantage, London: Pitman. Jahnukainen, Miikka and Ari P.J. Vepsäläinen (eds) (1998), Process Management Works – If only Implemented: Reassuring Experiences of Global, Technology-Intensive Companies from a Finnish Perspective, Helsinki: Systems Group Publications. Koistinen, Pertti and Kari Lilja (1988), ‘Consensual Adaptation to New Technology: The Finnish Case’, in Richard Hyman and Wolfgang Streeck (eds), New Technology and Industrial Relations, Oxford: Basil Blackwell, pp. 263–71. Lamming, Richard (1993), Beyond Partnership: Strategies for Innovation and Lean Supply, New York: Prentice-Hall.
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Lehto, Anna-Maija and Hanna Sutela (1999), Efficient, More Efficient, Exhausted: Findings of Finnish Quality of Work Life Surveys 1977–1997, Helsinki: Statistics Finland. Lilja, Kari (1998), ‘Finland: Continuity and Modest Moves towards Company-Level Corporatism’, in Anthony Ferner and Richard Hyman (eds), Changing Industrial Relations in Europe, Oxford: Basil Blackwell, pp. 171–89. Lundvall, Bengt-Åke and Mark Tomlinson (2002), ‘International Benchmarking as a Policy Learning Tool’, in Maria João Rodrigues (ed.), The New Knowledge Economy in Europe: A Strategy for International Competitiveness and Social Cohesion, Cheltenham, UK and Northampton, MA: Edward Elgar, pp. 203–31. McGuckin, Robert H. and Bart van Ark (2002), Performance 2001: Productivity, Employment and Income in the World’s Economies, New York: Conference Board. McHugh, Patrick, Giorgio Merli and William A. Wheeler (1995), Beyond Business Process Reengineering: Towards the Holonic Enterprise, New York: John Wiley. NUTEK (1999), Flexibility Matters – Flexible Enterprises in the Nordic Countries, Stockholm: Swedish National Board for Industrial and Technical Development. Paija, Laura and Pekka Ylä-Anttila (1998), ‘Elinkeinopolitiikka globaalissa verkostotaloudessa’, in Martin Ollus, Jukka Ranta and Pekka Ylä-Anttila (eds), Yritysverkostot – kilpailua tiedolla, nopeudella ja joustavuudella, Helsinki: Sitra, pp. 90–114. Schienstock, Gerd (1999), ‘Transformation and Learning: A New Perspective on National Innovation Systems’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Helsinki: Sitra, pp. 9–56. Semlinger, Klaus (1992), ‘Small Firms in Big Subcontracting’, in Norbert Altmann, Christoph Köhler and Pamela Meil (eds), Technology and Work in German Industry, London and New York: Routledge, pp. 342–58. Senge, Peter (1990), The Fifth Discipline: The Art and Practice of the Learning Organization, New York: Doubleday. Tuominen, Carita, Paul Lillrank and Sami Tuurna (2000), Laatukäsitykset suomalaisissa yrityksissä, Helsinki: Finnish Ministry of Trade and Industry. Uhmavaara, Heikki, Martti Kairinen and Jukka Niemelä (eds) (2000), Paikallinen sopiminen työelämässä, Turku: University of Turku, Faculty of Law. Ylöstalo, Pekka (2002), Työolobarometri 2001, Helsinki: Finnish Ministry of Labour.
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PART III
Regions and institutions
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8. The emergence of a regional innovation network: BioTurku in Turku, Finland Henrik Bruun* 8.1
INTRODUCTION**
Recent changes in the foundations of the international economic system have exposed regions to new challenges. Trends such as the liberalization and globalization of markets, technological development, the growth of the high technology sector and new ways to organize production and innovation have led to substantial changes in the conditions for economic growth in states and regions (Cooke and Morgan [1998] 2000). Capital, technology, firms and people are less and less restricted to traditional political or administrative boundaries, but move in what Castells (2000) calls a space of flows. States and regions need to attract those flows in order to sustain economic development. Since growth has been unevenly distributed across economic sectors, many regions have had to restructure their economies during the past ten or twenty years. The goal has generally been to exploit new growth areas, many of which involve the production and utilization of knowledge-intensive technologies. This chapter is a study of the emergence of a regional innovation network in Turku – a Finnish city undergoing the kind of transformation described above. Turku, just like many other cities that want to increase their competitiveness in the globalizing economy, has faced the challenge of increasing the innovative capacity of its local industry. A basic insight of modern innovation research has been that such capacity cannot be built by focusing on individual companies only. In this view, the source of competitiveness is equally much in the environment of the company as in the company itself (Freeman 1994; Lundvall [1992] 1995; Lundvall and Johnson 1994; Porter [1990] 1998). The notion of a ‘milieu of innovation’ has been used for designating local or regional environments that are successful in stimulating innovative activities (Castells and Hall [1994] 2000; Kostiainen and Sotarauta 2000). Such milieux are characterized by their capacity to create synergy between various elements and to channel this synergy into the generation of new knowledge, new processes and 147
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new products (see also Kostiainen 2000). According to Castells (2000, p. 421), ‘[m]ilieux of innovation are the fundamental sources of innovation and of generation of value added in the process of industrial production in the Information Age’. Turku faced this challenge under rapidly changing conditions for local policymaking. At the beginning of the 1990s, Finland experienced a severe recession, which was particularly hard on Turku as a result of its industrial structure. Local decision-makers were forced to pursue more active industrial policies, targeting investments to prioritized branches. Biotechnology was one of these. The new policies aimed at speeding up the growth of the already existing concentration of local biotechnological research and business. I refer to this concentration with the term BioTurku, a notion that is presently used by the local actors for self-designation. My hypothesis is that BioTurku is a regional innovation network rather than just an agglomeration of research and business. This is a crucial question for policy-makers, because network-oriented policies are quite different from policies oriented to support independently operating entities. A regional innovation network is a geographically embedded pattern of interorganizational interactions that converge around some particular field of innovative activity. In this context, ‘network policy’ means that policy-makers focus not only on regionally significant actors, but also on the complex interactions between them. In addition, a network approach helps to identify smaller actors – be they research organizations, companies, consultancies or something else – that are crucial for the network despite their modest size. In short, in network policies the focus is on interaction and systemic effects rather than on discrete actors. Network policies are appropriate only if there really exists a network of mutual interdependencies (Rip and Van der Muelen 1996). If this is not the case, network policies are likely to be inefficient. The empirical material was gathered through interviews, conducted in 2001, with 23 people from Turku, working in organizations that are parts of BioTurku. In addition to the interviews, various kinds of documents were used as primary material. Examples of such documents are strategic plans, memoranda, assessments, risk analyses, overviews, and so on. I have also benefitted largely from Maria Höyssä’s (2001) study of the building of a biotechnology centre in Turku and from my previous collaboration with her on the topic (Bruun et al. 2001), as well as from Nina Janasik’s comparative work on technology policy in the Nordic countries (not yet published). Information about the most recent events and trends in BioTurku was gathered through regular attendance at various seminars on Finnish biotechnology and biotechnology in Turku. The chapter is structured as follows. Section 8.2 provides the reader with some background information about the structure of biotechnology-related education, research and industry in the city. Section 8.3 accounts for the evolution of BioTurku through a series of ‘critical events’. Section 8.4 accounts
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for and discusses the performance of BioTurku in several performance dimensions: education, research, entrepreneurship, employment, commitment from local politicians and authorities and critical discourse. Finally, Section 8.5 discusses the consequences of the research results from a policy perspective.
8.2
BACKGROUND: LIFE SCIENCE RESEARCH AND THE PHARMACEUTICAL INDUSTRY IN TURKU
With its 172 000 inhabitants, Turku is Finland’s fifth largest city. It is situated in the southwestern part of the country, on the shore of the Baltic Sea. The economy of Turku is diverse, based on five ‘clusters’ structured around locally significant activities – shipbuilding; real estate construction maintenance and business; land and sea transport; publishing and printing; and the pharmaceutical and diagnostics industry. Turku was for a long time a relatively prosperous city and there was little pressure to develop local industrial policies. Things changed, however, in the 1990s when the Finnish economy was thrown into deep recession. Unemployment in Turku rose dramatically within a few years, from 4.2 per cent in 1990 to 22.1 per cent in 1994, and stayed at a high level for the rest of the decade. In 2001 the unemployment rate was still above 13 per cent. An additional problem was that Turku experienced a decline in productivity during most of the 1990s, in contrast to competing cities such as Helsinki, Tampere and Oulu. The City of Turku reacted somewhat slowly and only in 1997 was it ready for proactive measures. A Turku strategy was formulated and accepted by the City Council that year. It identified biotechnology, information technology and culture as strategic focus areas. Four years later, the key position of biotechnology for local industrial policy was confirmed in the second Turku strategy. The city of Turku hosts two universities – the University of Turku (16 200 students) and Åbo Akademi University (almost 7000) – a business school, Turku School of Economics (1900), a vocational high school, Turku Polytechnic (over 6000) and a vocational institute, Turku Vocational Institute (4500). The University of Turku and Åbo Akademi University are both traditional universities with a broad range of disciplines. However, neither of them has a general faculty of engineering (although Åbo Akademi has a faculty of chemical engineering) – a fact that is often used as an explanation for Turku’s inability to exploit the Finnish ICT boom. Instead, both universities are strong in life sciences, with a total of four faculties doing research in the area. This cluster of research and education has been organized in a cross-faculty and crossuniversity organization called BioCity Turku.
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Turku’s biotechnology industry has its background in the establishment of the pharmaceutical industry in the city in the late 1940s (Peldán 1967). Today, two of these firms remain: Orion and Leiras (the latter owned by German Schering AG). Orion Pharma is Finland’s most significant developer of new pharmaceutical drugs and some of its key research functions are still located in Turku. Before the end of the 1970s, the Finnish pharmaceutical industry based its business on acquiring licences for foreign products to be marketed domestically. In a world of national trade barriers, this was a successful strategy. It was also compatible with the general Finnish policy of self-sufficiency in sectors of national importance. However, as pressure towards freer trade increased during the 1970s, several Finnish firms decided to embark on internal drug development (Pirhonen et al. 1982). Some were successful. For instance, the Turku-based Farmos developed the first Finnish medicine for breast cancer in the early 1980s. The company also developed tranquillizers and analgesics for animals during that decade. The pharmaceutical industry saw the new strategy as a way to prepare for the westward exports that seemed necessary for compensating future market share losses in the domestic market. Product development, which is very expensive in the pharmaceutical sector, could be financed by the still profitable domestic market and by the export to Russia that had increased rapidly in the 1970s (Interview 1). The 1980s was a decade of consolidation: two companies, Orion Corp. (with headquarters in Espoo) and Huhtamäki Ltd, bought most of their competitors. Both companies were involved in several product development projects and much of this activity was situated in Turku (Farmos was merged with Orion in 1990; Leiras was merged with Medica Group to form Huhtamäki Pharmaceuticals in 1986; in 1992 Leiras once again became a separate legal entity). The 1990s brought radical changes in the operational conditions for the pharmaceutical industry. The Russian export market was closed and prices on the domestic markets started sinking. Partly in response to this, Orion and Leiras made the strategic decision to target their product development more narrowly, that is, to reduce the amount of R&D projects (Interview 1). In 1996, the Huhtamäki Group sold Leiras to the international pharmaceutical Schering AG (Leiras co-operation with Schering goes back to 1953. See Peldán 1967). Some of the R&D activities were moved out of the country, leaving Orion as the most significant Finnish ethical drug developer. At the same time, there was turbulence within another area of local strength, the diagnostics industry. Wallac Ltd, with a long tradition of R&D in Turku, was sold to PerkinElmer Inc. (formerly EG&G Inc.), a global technology company based in the US. As an effect of this turbulence, highly skilful researchers with considerable experience from working with the industry decided to start their own companies in order to pursue the projects that had been shut down. Many of them operated in Turku. Examples of such companies are Galilaeus Ltd (from Leiras), Focus
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Inhalation Ltd (from Leiras), Juvantia Pharma Ltd (from Orion) and Hormos Medical Ltd (from Orion). The drug discovery companies in Turku are presently doing clinical research on seven drug candidates for treatment of disorders and diseases such as heart failure, general anxiety disorder, Parkinson’s disease, osteoporosis, alcoholism and pathological gambling. Orion Pharma and BioTie Therapies are the only ones conducting Phase 3 studies. The lead products of Juvantia and Hormos are in Phase 2, and Orion and BioTie also have a few drug candidates each in this phase. All companies have product pipelines with several projects in the exploratory or preclinical phases of development. From the perspective of turnover, employment and commercial prospects for the future, the pharmaceutical industry is the cornerstone of the local biotechnology cluster. Yet BioTurku is not all about pharmaceuticals. At the end of 2002 it included 63 companies operating in a broad spectrum of sectors, among them pharmaceuticals (9 companies), diagnostics and biotechnology products (15), instrumentation and equipment (8), biomaterials (4), functional and clinical food products (5), research services (9) and business and innovation services for biotechnology companies (10).1 BioTurku as a whole, including university research, was estimated to employ 3000 people in 2000. According to the targets of the local cluster development company, by 2010 BioTurku should employ up to 10 000 people (Nordic Adviser Group 2000). It is also expected to produce 1–5 new companies a year in 2000–2005 and 5–10 in 2005–2010. By 2010, the target document states, at least one of the young biotechnology companies should have become an internationally significant player. At the time of writing (Autumn 2000) these targets have been reached, despite the economic downturn in 2001 and 2002. According to the estimates of Turku Bio Valley Ltd, 500 new jobs have been created since 2000, mainly in the pharmaceutical industry. In addition, the annual rate of 1–5 new companies has been exceeded.
8.3
THE BIOTURKU TRAJECTORY
BioTurku has no definitive date of birth. There was already collaboration between university and industry in the 1970s (Höyssä 2001). However, in the sense of broad collaboration between different universities, industry and public authorities, BioTurku is a relatively recent creation. The construction of the BioCity building and its facilities for the Centre for Biotechnology in 1989–1992 can perhaps be seen as a kind of birth.2 This was paralleled and followed by a series of other critical events or activities: the emergence of the BioCity Turku research community during the 1990s, the Centre of Expertise Programmes of 1994–1998 and 1999–2006, the City of Turku’s decision in 1999 to found Turku Bio Valley Ltd, the working out of a common strategy for BioTurku in 2000, the redefinition of Turku Bio Valley’s mission in 2001,
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the building of PharmaCity and the first development project in Bio Valley (an area, not the company) that same year. A few words about each of these events are necessary for fleshing out the history of BioTurku, and more particularly for assessing the degree to which BioTurku is constituted by local and regional interorganizational interaction. To recapitulate, the task that I set for myself was to investigate whether BioTurku is an agglomeration of organizations and activities, or whether it should be seen as a true network of interaction, interdependence and mutuality. The organizational chart in the Appendix is provided to facilitate reading. 8.3.1
The BioCity Building
BioCity is a seven-floor technology centre building that was finished in 1992. BioCity represents the first substantial attempt in Turku to create a permanent structure for synergy between biotechnology-related academic research and industry. It can therefore be interpreted as a symbol for the birth of BioTurku. The social interaction surrounding the construction of the building has been described and analysed in Höyssä (2001) and Bruun et al. (2001). BioCity was a real estate project, initiated by a construction firm in collaboration with scientists and people working with the industry. Eventually it became more and more of a university project. Both universities moved departments or parts of departments into the new building. The most path-breaking achievement was perhaps the Centre for Biotechnology – an institute shared by the two universities, with the City of Turku as a significant financier. The Centre, which is administered by a board of its own, soon developed into a kernel for research activities across the boundary between academia and business. Some of its more important research orientations have been structural protein research (protein crystallography), cell biology, molecular biology and, most recently, functional genomics. It also provides access to core technologies, such as DNA micro array technology, for the larger research community and (against a fee) for the local biotechnology companies. This system of sharing expensive instruments seems to have been successful. Recently, an international evaluation panel suggested that the Turku model should be expanded into a system of core facilities covering all biocentres in Finland (Academy of Finland 2002). 8.3.2
Education and Research
As the two universities moved into the BioCity building in 1992, the existing cluster of life science research and education was organized in a cross-faculty and cross-university organization called BioCity Turku. Administratively, BioCity Turku belongs to neither of the universities, but has its own board with representatives from both of them. Industry is also represented on the board.
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BioCity Turku’s mission is to effect collaboration, resource sharing, infrastructure development, and synergies in research and education in the area of life sciences. The model of structured interdisciplinary collaboration has been perceived as successful and it has been suggested that it should be diffused to other faculties and departments within the university (Tomlin 1999). BioCity Turku is presently structured in four research programmes – the Receptor Structure and Function programme, the Centre for Reproductive and Developmental Medicine, the Turku Immunology Centre and the Systems Biology Research Programme. In addition, the two universities host or participate in seven graduate schools3 in the life science area, employing 182 graduate students (2000) from Turku in four-year positions. In 1999, the BioCity Turku community produced 94 doctoral degrees (Working Group for Research and Education 2000), which amounts to 54 per cent of the 1999 doctoral degrees at the two universities and 15 per cent of the corresponding life science degrees in Finland (the KOTA database, Ministry of Education). In 1997, an evaluation panel found 11 (out of 40) research groups at BioCity Turku to be of a high international level. The panel also praised the BioCity Turku structure for being ‘a very effective instrument for bringing both fundamental and applied research together under the same roof’ and urged the community to maintain its ‘excellent tradition of collaboration between groups’ (Saraste et al. 1997). A set of other facts support the positive assessments of the quality of the research. Up to 2002, the community had published 26 articles in scientific journals of impact factor greater than 6.0. Domestic competition is hard, however. Biocentre Helsinki has 28 publications, Biocentre Oulu 30 and the Institute of Medical Technology, Tampere 30 in journals of equal quality (see also Table 8.1). BioCity Turku presently hosts two out of 18 biotechnologyrelated national Centres of Excellence, selected by the Academy of Finland. Further, the community hosts two Academy Professors (Academy of Finland) and is thereby the only organization located outside Helsinki to have researchers with this high rank status in the field of biotechnology. Finally, BioCity Turku has been very successful in applications to the EU biotechnology programmes, with partnership in 47 projects in 1996–20014 (Academy of Finland 2002). All in all, Turku is doing relatively well in a country with hard internal competition for excellence and several regional innovation environments of high standard in biotechnology-related education and research (see Table 8.1). Despite primarily being an academic organization, BioCity Turku has had an important networking role through its emphasis on collaboration across disciplinary, faculty and university boundaries. Turku Polytechnic and Turku Vocational Institute supplement the universities by educating bio- and food technology engineers, medical laboratory technologists, laboratory assistants, and so on. Another important institution is the University Hospital of Turku (TYKS), which is one of five university hospitals in Finland, and which actively
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collaborates with both the local pharmaceutical industry and the Faculty of Medicine at the University of Turku. Further, the local business school, Turku School of Economics, offers a BIO Module (20 credits) within its MBA programme. The module is intended for executives and top-level experts in the life sciences sector. Table 8.1 Indicators of regional performance in biotechnology-related research City
Articles Centres of (i.f. > 9.0)* Excellence (bio)
Helsinki Turku Tampere Kuopio Oulu
24 12 19 10 29
9 2 2 1 2
Academy Professors
Partnerships in EU programmes**
10 2 -
103 49 19 17 19
* Articles in journals with an impact factor greater than 9.0 (= top journals). The numbers include the local Biocentres only (thus, publications produced at departments that do not belong to the Biocentres are excluded). I have assumed that there is a 100 per cent overlap between Biocentrum Helsinki and the Institute of Biotechnology Helsinki. ** EU biotechnology projects in 1996–2001. I have assumed a 100 per cent overlap between the local universities and the local biocentres. The numbers given are for the universities in each city. Source:
8.3.3
Academy of Finland (2002), pp. 29, 36, 38
The Centre of Expertise Programmes
The BioCity building was built as a part of an already existing technology centre organization called Data City Centre Ltd (DCC). DCC was later (1999) renamed as Turku Technology Centre Ltd (TTC). DCC was established in the context of constructing Turku’s first technology centre building, the information technology-oriented DataCity, but its sphere of responsibilities was successively extended to include also the bio-field. The most important source of funding for DCC, and later TTC, has been the National Centre of Expertise Programme. This is a national programme for regional development, administered by the Ministry of the Interior. (It should not be confused with the Academy of Finland’s Centre of Excellence Programme.) Regions can apply for funding for projects carried out within a regional Centre of Expertise framework. The idea is to target funding on focused local efforts. At the regional level, the projects are generally administered by a technology centre, such as the DCC. Turku has participated in both the 1994–98 and the 1999–2006
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programmes, with biotechnology as a key focus. The local projects were designed by various people from the industry and the universities, and were operated by DCC. The provincial federation Southwest Finland and the City of Turku participated in the funding. The target of the first programme of expertise was to improve the local infrastructure for research and entrepreneurship. It led to the establishment of a series of units for preclinical and clinical research services at the University of Turku: Clinical Research Services (CRST), the Preclinical Pharmacology Research Unit (PreFa) and Safety City. CRST and Safety City were later (2001) turned into independent companies (and PreFa was integrated with the latter in 2002). The second programme of expertise, which is still going on, puts more emphasis on creating new workplaces and companies, and on the region’s international visibility. The flagship project is perhaps the establishment of a national cluster organization, the Finnish Pharma Cluster, for companies and universities involved in drug development (Southwest Finland Centre of Expertise 1998). In 2001, the Pharma Cluster published a target programme for the Finnish pharmaceutical industry (Brännback et al. 2001). Despite these activities, DCC never acquired a strong position in BioTurku. DCC had few sources of income and biotechnology was just one of the fields it was supposed to promote. Criticism of DCC and a reorganization of the technology centre led in 2002 to the relocation of the centre of expertise administration of biotechnology projects to a new cluster organization for biotechnology, the Turku Bio Valley Ltd. 8.3.4
Turku Bio Valley and the BioTurku Strategy
As described in section 8.2, the turbulence within the local pharmaceutical and diagnostic industry in the middle of the 1990s strongly vitalized the commercial segment of BioTurku. The BioCity building turned out to be an ideal environment for the new spin-off and start-up companies. It provided them with representative facilities and a stimulating environment in which collaboration with university researchers and providers of research services could be pursued on a day-to-day basis. However, the strong growth of some of these companies, and their expected advances from product development to production, seemed to suggest that the BioCity facilities would soon become too small. The City of Turku, which was now pursuing more proactive industrial policies, and which had defined biotechnology as one of its priorities, decided to found a new company, Turku Bio Valley Ltd, for ‘owning, managing and fixing facilities for the growing high-tech companies in the Turku region’. The name of the company derives from the area, the ‘Bio Valley’, that it was given to develop (Turku City Council 1999). The City of Turku invested 12.6 million euros in Turku Bio Valley. The financial arrangements implied that the city’s shares of
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one of the already existing technology centre buildings were to be transferred to Turku Bio Valley, thus giving it the capital and income (through rents) that DCC/TTC had never had. Juhani Leppä, a former city mayor, was appointed as managing director. Perhaps as a result of being new in the field, Leppä felt that there was a need for gathering local actors in the bio-field in order to help Turku Bio Valley to define its own strategy. Such co-ordination was important in ensuring that a sufficient customer base existed for the risky real estate business of the company. Leppä was afraid that the decision to invest heavily in production facilities had been premature, based on a belief that the cluster was more mature than it really was. He initiated a strategy process in the spring of 2000 and managed to enrol all significant members of BioTurku. Leppä’s initiative was timely because, as a result of the rapid developments at the end of the 1990s, many actors felt a need for getting an overview of the network. Businesses were, of course, also interested in benefitting from the resources that the City of Turku was investing in the field. In addition, they had an interest in guaranteeing a future supply of people with a proper education. At the same time, the vocational schools and the universities needed to know how their educational programmes fitted existing and future labour markets. The city, on the other hand, had a chance to make an inventory of its recently selected priority of industrial policies. The city’s mayor Armas Lahoniitty, deputy mayor Juhani Määttä and trade promoter Ilpo Siro all participated in the strategy work. The strategy work had some unexpected consequences. First, it resulted not only in a strategy for Turku Bio Valley, but also in a strategy for the whole of BioTurku (Working Group for Research and Education 2000). Strategy processes have, of course, no value in themselves and are part of the ordinary life of many organizations. In this case, however, we are not talking about a strategy for some specific organization, but for the regional innovation network as a whole. These kinds of regional cluster strategies are not particularly common – neither in Finland nor in the rest of Europe. The strategy framed BioTurku as an innovation chain – from education and basic research to production – and various weak or missing links were identified. A set of shared targets and recommendations were formulated.5 Most of these concerned projects that had already been started and cannot as such be seen as a result of the strategy work. What was significant, however, was that individual projects could now claim to have back-up from the cluster as a whole. This has, according to several interviewees, been crucial for speeding up many of the endeavours. 8.3.5
Turku Science Park
The strategy process described above revealed that there was no organization taking responsibility for the management of the innovation network as a whole.
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The existing boundary-crossing organizations were all restricted in this sense; BioCity Turku focusing on academic collaboration only, the Centre for Biotechnology being exclusively research-oriented and DCC/TCC being too broad and lacking the resources for any more significant input. Leppä wrote a brief to the city administration in which he argued that the city should take action for ensuring the proper management of the bio-cluster (Leppä 2000). Such measures, argued Leppä, would have consequences for the whole technology centre structure. Leppä’s initiative coincided with another initiative to reorganize the city’s technology centre into a much broader structure, called the Turku Science Park. The new ideas attracted the city administration, which established a working group to plan the new structure. The outcome was a proposition that the technology centre be rearranged in a three-company structure in which a new company, Science Park Ltd, would have responsibility for the development and marketing of the science park as a whole, while two cluster corporations would manage and market ‘the strategic branches’ (‘bio’ and ICT). More specifically, the cluster corporations were assigned responsibility in the following areas: business administration, R&D management, administration of projects and programmes, incubators, pre-seed money, technology transfer, venture capital, facilities, equipment and other services. It was emphasized that the cluster corporations should not be general purpose developers, but operate on a strict customer basis – the customers being ‘branchspecific business groups and their service-providers (including the state, region, sub-region and the city)’ (Working Group for Reorganisation of the Technology Centre Activities 2001). The working group also suggested that Turku Bio Valley’s articles of association be changed so that it could function as the cluster corporation for BioTurku. Things happened quite fast here. In July 2000, Leppä complained to the city administration that ‘unless BioTurku is resolutely managed, Turku Bio Valley Ltd will not have customers’. Eight months later, the City Board was already discussing whether Turku Bio Valley itself should be turned into that resolute manager. Formally, this happened in January 2002. 8.3.6
Real Estate Development
At the same time, BioTurku has been expanded through a series of construction projects. A building called PharmaCity was erected next to BioCity in 2001. PharmaCity, just like its neighbour, contains a mix of academia and business. Some of the young bio-companies (Hormos Medical, Juvantia) needed bigger facilities and moved to PharmaCity. VTT Technical Research Centre of Finland located a new research unit, its first in Turku, in the building. PharmaCity’s basement hosts a test animal service centre. The building is owned by VarmaSampo, a Finnish insurance company, which accepted the purchase of it after Turku Bio Valley committed itself to renting three floors (which are
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leased to the companies mentioned above). Expansion is also occurring in the Bio Valley area (a place in Turku), where Turku Bio Valley (the company) has built office and quality control facilities for Novatreat (2500m2) and a pharmaceutical plant for Focus Inhalation (12 000 m2) – both of which are recently established companies (Novatreat 1997, Focus Inhalation 2000). This section has shown that BioTurku evolved through a series of critical events in which the locus of initiative was in constant shift; from real estate companies and the universities in the phase of planning and constructing the BioCity building; to BioCity Turku during the phase of establishing crossfaculty and cross-university research programmes; to DCC and a mix of university departments and companies as the programmes of expertise were designed and implemented; and, most recently, to Turku Bio Valley and the City of Turku in the strategy-making and science park-building phase. At the same time, all these processes involved interorganizational collaboration. The construction of the BioCity building was initiated by real estate companies in collaboration with scientists from the universities and the industry, while most of the actual planning was done by the two universities together. BioCity Turku formalized collaboration between the universities and encouraged interaction across disciplinary boundaries. DCC used scientists from the industry and the universities to plan the programmes of expertise, and the City of Turku was represented at a high level in the DCC board. Further, Turku Bio Valley has made even more extensive and systematic use of the BioTurku network of people and organizations. Its strategy work involved 70–100 people and in 2002 it acquired the formal position as a cluster organization. In sum, an analysis of the critical events suggests that BioTurku really can be seen as a regional innovation network, rather than as an agglomeration of more or less independent activities. This impression acquires further confirmation from the day-to-day reality of BioTurku, as it was described by the interviewees. People circulate between organizations, transferring knowledge from one to the other. Knowledge is also shared through various forms of collaboration. There are many examples of flows or interactions across organizational boundaries: the universities and vocational schools providing industry with educated people; crossfaculty/cross-university research schools and research programmes; equipment sharing between departments, universities and university and business; shared research projects between university and industry; university researchers doing contract research for the industry; service units providing the industry and the universities with different kinds of research-related services; the business school educating executives of bio-businesses; the business school doing market research for companies; common marketing of the network as a whole and so on.
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PERFORMANCE AND CHALLENGES
What about the performance of BioTurku as a regional innovation network? What has been achieved and what are the challenges for the future? In the following analysis, I will interpret performance in a broad sense, so as to include also non-economic dimensions. 8.4.1
To What Extent do Network Members Benefit from BioTurku?
To evaluate this we must distinguish between direct and indirect benefits. The benefit is direct if collaboration with other parties is instrumental in the achievement of the actor’s immediate goals. The benefit is indirect if an organization benefits from the effects that the network as a whole produces, without necessarily being involved in much concrete interaction with other members. BioTurku gives several examples of both direct and indirect benefit. Local sources of direct benefit are, for instance, shared research projects, instruments and marketing campaigns; the building of facilities for bio-companies; the new incubator for bio-companies and its structure for pre-seed funding; research and marketing services; and the Centre of Expertise Programmes that channel national money to the local community. Beneficiaries of such collaboration are, for instance: university departments and companies, which are able to attract funding from national financiers; entrepreneurs, who acquire valuable help in setting up new companies; and small bio-companies, which need to externalize a substantial part of their R&D. Other actors are more indirectly supported by the BioTurku network. Thus the universities, the city and the larger corporations will be indirect beneficiaries if BioTurku succeeds in attracting regional, national and international flows of people, knowledge and capital. One of Turku Bio Valley’s main challenges, in its role of cluster corporation, will be to maintain and deepen the sense of mutual benefit that exists within BioTurku. 8.4.2
Educational Capacity
BioTurku’s educational capacity has been growing and there is a strong bio-educational chain from vocational schools to universities. Also, training programmes that are specifically designed for the needs of the bio-industry have started occurring, most notably at the vocational schools. However, in relation to the challenges of the future, it seems that further changes are needed, both in the quantity and the contents of education. Several interviewees expressed concern about the universities’ ability to provide industry with the required number of people with the right kind of education. Reaching the target of 10 000 workplaces in 2010 means that employees are needed for at least
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6500 new jobs. Many of these will require competences that are in short supply. The overall development threatens to exceed the capacity of the local educational system, which already fails to meet demand. In 2002, the University of Turku had 322 applicants for 40 positions in biochemistry, 331 applicants for 35 positions in biology and 634 applicants for 160 positions in medicine. The situation is similar in the other Finnish universities operating in related fields (Academy of Finland 2002). As a result, parts of the future workforce must be found from other parts of Finland or from abroad. Considering that there is already strong national and international competition for educated people in the bio-fields, the problem can be serious. Since both universities consider their strength to be in their broadness, it is quite unlikely that the problem of lacking a workforce will be solved by rapid changes in the priorities of the universities. Attracting people from outside areas, on the other hand, requires efforts to make Turku an attractive city for potential employees. BioTurku is thus dependent on city policies in fields like housing, the environment, day care, education and culture. It can be expected that the ability of the network to influence policies across such a broad range of sectors is dependent on the degree to which Turku Bio Valley and Turku Science Park can claim themselves to be spokesmen for the network. Thus a certain degree of concentration of representative authority will be needed. 8.4.3
Research Performance
Research performance is good, as described in section 8.3 – especially in immunology, receptor biology, biophysics and computational biochemistry. However, the universities have been criticized for having conservative structures, lacking, for instance, a proper tenure-track system. According to an international evaluation panel (Academy of Finland 2002), this prevents young researchers from forming their own research groups and minimizes the number of postdoctoral fellows. Furthermore, the quantitative rules for the structure of a dissertation (the four published papers rule), ‘deters students from tackling difficult projects’ in order to safeguard success in meeting the requirement (ibid., p. 73). This is, according to the aforementioned evaluation panel, a disincentive to path-breaking research, which is particularly problematic in a country such as Finland, where research is largely done by graduate students. The panel argues that ‘training scientists should aim to raise their level of ambition to tackle difficult and important problems, where success is not inevitable and is judged by content rather than the number of publications’ (ibid., p. 48). The ‘structural conservatism’ of the universities is not a problem only in Turku, but concerns all Finnish universities. Yet the evaluation panel chose to highlight these problems when discussing biotechnology in Turku, because they are ‘in striking contrast to the inventiveness and co-operativity
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of the [BioCity] community’ (ibid., p. 73). One way of interpreting this state of things, even if the Panel does not mention it, is that there would be better prospects for rapid change in the universities of Turku than in other Finnish cities, if only some of the BioCity spirit could enter the universities. 8.4.4
Entrepreneurship
Turku hosts a large share of new Finnish technology companies (in the sense of knowledge-intensive small companies that are less than five years old) in the life science field. According to Finnish Bio Industries, more than 40 per cent of Finnish start-up companies in the fields of medicine and diagnostics were situated in Turku (Kuusi 2001). These companies have also been successful in attracting venture capital. Finland’s two major venture capital companies in the life science field are Sitra (public) and BioFund (private). Twenty-five per cent of Sitra’s present investment objects in the bio-field, and 18 per cent of the companies in BioFund’s portfolios I and II are situated in Turku. The corresponding numbers for the cities in the much larger capital region (Helsinki and Espoo) are 20 per cent and 18 per cent. However, many expect the entrepreneurial leadership to move from Turku to Helsinki in the next few years as a result of recent investments in innovation infrastructure there. 8.4.5
Employment
BioTurku is estimated to employ some 3500 people. The trend of employment has been positive, but will have to accelerate significantly if the target of 10 000 jobs is to be reached in 2010. Such a development is not beyond the realm of possibility, considering that many of the existing start-up or spin-off companies are working on products that will be commercialized during this decade. Yet commercialization does not automatically mean a dramatic increase in employment, since most companies plan to license their products to producers outside Turku. Some of the interviewees considered the ‘old’ pharmaceutical and diagnostic industry to be more significant for future employment than the new, smaller enterprises. The positive development in the area also makes the arrival of one or two large foreign employers an increasingly likely scenario. In sum, BioTurku’s present performance in employment is not very informative about its employing capacity in the future. 8.4.6
Attracting ‘External’ Organizations and Extra-regional Collaboration
BioTurku has not been successful in attracting multinational companies to start new activities in the area. Both Schering and Perkin-Elmer took over already
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existing companies. On the domestic side, some companies have chosen to relocate to Turku from other Finnish cities. Orion Pharma has expanded its research activities in Turku and in 2001 VTT Technical Research Centre of Finland decided to start a new drug development unit in Turku. The small size of BioTurku might turn out to be a significant restriction in the future. The local perspective on development therefore risks being in conflict with the needs of the industry. A sign of this is the national Pharma Cluster initiative that was taken by the new pharmaceutical industry in Turku. This ‘cluster-network’ organizes collaboration nationally, not locally. BioTurku is simply quite small when compared with other European and American concentrations of bio-industry, and openness to extra-regional collaboration will become increasingly significant. 8.4.7
Public Commitment
Public involvement in BioTurku has increased significantly during recent years. This means that societal approval is becoming more significant for the cluster. Until now, BioTurku has been successful in achieving such approval. There seems to be little criticism of the public commitment, or of the prevailing research orientations and industrial activities. Public approval is mediated by the city’s elected representatives. Worryingly, however, most interviewees felt that local politicians have little interest in, and knowledge of, BioTurku, and that their involvement generally means trouble rather than constructive input. It is striking that none of my 22 interviewees mentioned any City Board or City Council members as people who should be interviewed about BioTurku, and when asked about it, most interviewees had serious difficulties in coming up with even one name. If this reflects the state of knowledge and interest in these matters among local politicians, public involvement in BioTurku might turn out to be provisional only. The commitment to public long-term investments in the science park and its clusters would be threatened whenever an economic downturn makes more immediate problems pressing. Yet, as a result of restrictions in its design, this study cannot verify the interviewees’ statements about the involvement of politicians. Whatever the case, it seems that openness in relation to local political forces would be a sound long-term policy, even if exclusion in this direction were more efficient in the short run. There are important problems to be solved concerning the relation between the public and private domains. Through Turku Bio Valley, the City of Turku promotes private business with huge profit opportunities and high risks. The continued legitimacy of this kind of policy will depend on maintaining taxpayers’ trust in the sincerity of the BioTurku actors and in the control mechanisms related to the use of public money. Policy implementation through public corporations, such as Turku Bio Valley, risks failing to address the issue
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of political involvement and control. Some of the characteristics of the BioTurku network even undermine such control – most notably, the low degree of transparency and the relatively high degrees of density and informality. How can the public sector combine the need for political support and control with its desire to promote a dynamic, competitive and economically successful biocluster? This is a problem that needs to be addressed not only to safeguard the interests of taxpayers, but also to ensure the long-term involvement of the city and consistent public policies. 8.4.8
Critical Discourse
An additional issue related to political legitimacy is openness to criticism. In the hands of Turku Bio Valley, BioTurku is being branded. One of the company’s main tasks is to market the cluster. All interviewees, and particularly city administrators and business people, emphasized the importance of image creation. Image, they argued, is important for attracting students, researchers, funding for research, other investments and companies to Turku. It is also significant for mobilizing local support for the involvement of the city. Images should, according to all interviewees, be based on ‘substance’, because most actors in the field have the capacity to reveal fraud. However, since BioTurku ‘really is a dynamic cluster’, the interviewees felt that this should be highlighted in the communication to internal and external parties. A continuous flow of new steps forward in the building of the cluster is therefore of great importance; ‘something must happen all the time’ (Interview 1). Now, as a social scientist one is inclined to ask to what extent this aspired-to image of smooth development and continuous enthusiasm risks suffocating possible criticism, both related to the city’s involvement in BioTurku and to the ways in which biotechnology is put to use. As BioTurku becomes a part of the city’s identity and economic strategy, it becomes increasingly difficult to neglect the effects of criticism on local success. Thus, integration and consistency, which are important from the perspective of short-term economic performance, might turn out to undermine critical discourse.
8.5
DISCUSSION
This study has shown that BioTurku really can be understood as a regional innovation network rather than an agglomeration of separate activities. At the beginning, BioTurku was a relatively centred6 network, with universities being the powerful actors, while the pharmaceutical industry operated more or less independently. However, in the latter part of the 1990s many new bio-companies were established. At the same time, the City of Turku redefined its interests in
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the bio-field. This has pushed the network in a more decentred direction, with the universities, the new bioindustry and the city as the powerful nodes. It seems reasonable to assume that BioTurku is characterized by a relatively high degree of connectivity, which means that several actors (such as the small biotechnology companies or organizations at the interface of activity domains, such as DCC/TTC, the Centre for Biotechnology and Turku Bio Valley) are in intense interaction with other members of the network, and therefore dependent on it. They also have relatively consistent views of BioTurku and its future. At least there was a large consensus on the goals and the needs of the network, as articulated in the BioTurku strategy and in Turku Bio Valley’s strategy report (Nordic Adviser Group 2000; Working Group for Research and Education 2000). None of my interviewees contested the contents of these documents, and none of them questioned the initiatives taken by the city to establish the science park and the cluster organization for the bio-field. All seemed to accept the role that Turku Bio Valley had taken upon itself as a manager of BioTurku. From the perspective of policy-making, the networked nature of BioTurku means that it should be wise to design policy measures that support interaction and create interfaces between activities and organizations, rather than measures that promote discrete activities or individual actors. This is already happening both at the local and the national levels. At the local level, Turku Bio Valley pursued network policies from the start. At the national level, several authorities do the same. The most significant of them, from the network policy perspective, is the National Technology Agency (Tekes), which is one of the two main financiers of Finnish biotechnology R&D. Thus it seems that the present principles for policy-making are appropriate for meeting the challenges mentioned above. It is important, however, that policy-makers attend to the actual characteristics of BioTurku as a regional innovation network. At the moment, this is done more or less intuitively. I suggest that network policies could be further systematized, explicitly taking into account network features such as concentration, connectivity and goal consistency. Other important network characteristics are ‘openness’ and ‘formality’. BioTurku has a history of being an open and informal network. Today the network is being formalized as a part of the science park structure, which could mean that some of its openness is lost in the future. Several interviewees expressed the fear that the establishment of Turku Science Park, with its two cluster corporations for ‘bio’ and ICT, might give rise to sharpened competition for public resources between the two clusters. This could be detrimental to collaboration across the cluster boundaries in emerging fields such as bioinformatics. Yet another parameter for evaluating network performance is ‘transparency’, referring to the clarity of the overall picture that people have of the organizations in the network and the relation between their activities. Transparency in this sense has always been a problem for BioTurku. Many of the initiatives that
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were taken to develop the network were actually responses to a lack of transparency. The new cluster organization could perhaps remedy this by actively informing about BioTurku to all relevant internal and external parties, and by actively supporting the co-ordination of activities. Under conditions of the rapid growth of the network that is expected to occur the next few years, this could turn out to be quite a formidable task. All in all, this study suggests that network features such as informality, connectivity and goal consistency enhance performance in certain areas, such as education, research and entrepreneurship, while at the same time being potentially problematic for other kinds of performance, for example, broad participation in decision-making, political legitimacy and critical discourse. The latter require openness and transparency and perhaps also a formality that guarantees participation to actors who do not have access to the informal networks. There is also a tension between the need for closure and concentration in order to build lobbying power for the network, on the one hand, and the need for openness and distributed decision-making to maintain flexibility, on the other. These are the contradictions that network policies face, and the future of BioTurku is at least partly dependent on how well its actors can balance between the conflicting needs.
ACKNOWLEDGEMENTS I thank all the interviewees for their participation and positive attitude towards the study, and Turku Bio Valley Ltd for helping me with arranging interviews. I particularly thank Maria Höyssä for her extensive work in commenting on the text. Janne Hukkinen, Andrew Jamison, Richard Langlais, Reija Linnamaa, Terttu Luukkonen, Mikko Rask, Johanna Reiman, Markku Sotarauta, Göran Sundqvist and Knut Sørensen also gave me valuable feedback on earlier versions of the manuscript.
NOTES * Henrik Bruun, Helsinki University of Technology, Laboratory of Environmental Protection, P.O.Box 2300, 02015 HUT, Finland. Tel. +358 9 451 3855, Mobile +358 50 5174160, Fax +358 9 451 2359, E-mail
[email protected] ** This research was funded by Nordregio, the Academy of Finland and the National Technology Agency of Finland (Tekes). Earlier versions of the article have been published in the report series of the Helsinki University of Technology Laboratory of Environmental Protection and Nordregio. 1. These numbers are based on Turku Bio Valley Ltd’s list of ‘BioTurku companies’ in early December 2002.
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2. The Centre for Biotechnology was founded already in 1988, and operated on a small scale in the Data City building until BioCity was finished. 3. The Graduate Schools are a part of the national system of higher education. They are administered by the Ministry of Education. 4. Compare with Biocentre Helsinki (22 projects), Biocentre Oulu (12 projects) and Institute of Medical Technology, Tampere, (16 projects). 5. Collaboration between educational organizations on the realization of new training programmes, a strengthening of the Centre for Biotechnology in the area of functional genomics, the establishment of a drug development centre within the framework of BioCity Turku, strengthening the position of the Centre for Biomaterials in the university structure, the establishment of a national food development centre with an interdisciplinary orientation, attracting the VTT Technical Research Centre of Finland to Turku, the quick establishment of an incubator exclusively for bio-businesses, the development of clean room activities, and investigations into how international bio-industry could be attracted to Turku more efficiently. 6. Centred networks are based on asymmetrical relations, such as hierarchies of command or a supplier network that is dominated by one big user. Decentred networks, on the other hand, consist of symmetrical relations: mutual friendship, equal terms for participation, and so on. (Mattila and Uusikylä 1999).
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Kuusi, H. (2001), ‘Finland a European Leader in Biotechnology’, Kemia-Kemi, 28 (6), 432–7. Leppä, Juhani (2000), Turun teknologiakeskuksen tulevaisuuden näkymät [The future of Turku technology centre], Turku: 12 July 2000, Brief to Turku City Administration. Lundvall, Bengt-Åke, (ed.) ([1992] 1995), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London and New York: Pinter. Lundvall, Bengt-Åke and Björn Johnson (1994), ‘The Learning Economy’, Journal of Industry Studies, 1 (2), 23–41. Mattila, Mikko and Petri Uusikylä (1999), ‘Mitä on verkostoanalyysi?’ [What is network analysis?] in Mikko Mattila and Petri Uusikylä (eds), Verkostoyhteiskunta. Käytännön johdatus verkostoanalyysiin, Helsinki: Gaudeamus, pp. 7–21. Nordic Adviser Group (2000), Biolaakso: Loppuraportti [Biolaakso: Final report]. Turku, 16 November 2000, Biolaakso Ltd. Peldán, Kerttu (1967), Suomen farmasian historia [History of Finnish pharmacy], Helsinki: Suomen farmaseuttinen yhdistys. Pirhonen, Pentti, Juhani Saraste, Erik Borg, Hannu Helle, Holger Rosenblad and Veikko Sonninen (eds) (1982), Lääketeollisuusyhdistys 1957–1982, Rauma: LTY. Porter, Michael E. ([1990] 1998), The Competitive Advantage of Nations. With a New Introduction, Basingstoke: Macmillan Press. Rip, A. and J. R. Van der Muelen (1996), ‘The Post-Modern Research System’, Science and Public Policy, 23 (6), 343–52. Saraste, Matti, Jonathan Knowles and Ari Helenius (1997), Selection of BioCity Research Groups to form the new Turku Centre of Excellence, Turku: Report to the Advisory Board of BioCity Turku. Southwest Finland Centre of Expertise (1998), Ohjelmaesitys kaudelle 1999–2006 [Programme proposal for the period 1999–2006], Turku: Data City Centre Ltd. Tomlin, Richard (1999), ‘University of Turku – External Impact of Research, Technology Transfer and Regional Liaison Activities’, Publications, 5, University of Turku, Rector’s Office. Turku City Council (1999), Kiinteistöomistajayhtiön perustaminen [Foundation of a real estate owning company], Turku, 11 Janury 1999, 8736-1998 (70, 642, 010), Kv § 18. Working Group for Reorganization of the Technology Centre Activities (2001), Teknologiakeskustoiminnan uudelleen järjestäminen [Reorganization of the Technology Centre activities], Turku: Memorandum, Turku City Administration. Working Group for Research and Education (2000), Turun bioalan strategia [Strategy for the bio-sector in Turku], Turku: Biolaakso Ltd.
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APPENDIX: ORGANIZATIONAL CHART OF BIOTURKU (organizations still existing in bold)
Farmos 1958/1947
Orion Group 1970/1917
Leiras 1949/1946
Galilaeus 1994
Schering AG
Wallac 1950
Juvantia Pharma 1997
Focus Inhalation 1999
Hormos Medical 1997
Cities of Raisio and Kaarina, YIT Data City Patron Ltd ÅA Foundation UTU Foundation
Control Pharma 1998
DCC DataCity Centre 1988 → Turku Technology Centre 1999
PerkinElmer
Valio 1905
Novatreat 1997
Raisio Group 1939
Other companies (some examples) Biotop 1992 HyTest 1994 Biofons 1994 Innotrac Diagnostics 1995 Abmin Technologies 1996 CellTest 1997
City of Turku
BioCity Turku 1999 (informally since 1993) – Research programmes
Science Park 2001
Turku Bio Valley 1999 Centre for Biotechnology 1988
Turku School of Economics and Business Administration – Innomarket
Åbo Akademi University ÅA – Faculty of Mathematics and Natural Science – Faculty of Chemical Engineering
ICT Turku 2001 BioCity S. A. Board 1992 Technology centre buildings DataCity 1988–89 BioCity 1992 ElectroCity 1989 EuroCity 1999 Old Mill 2000 PharmaCity 2001
SafetyCity 2001
University Hospital of Turku
Turku Polytechnic
University of Turku UTU – Faculty of Medicine – Faculty of Mathematics and Natural Sciences – PreFa 1997 – SafetyCity 1997
CRST 1995/2001
BioTie Therapies 2002 (1996/1992)
Turku Vocational Institute
Explanations of arrows and shading: Becomes part of, is merged with
Limited company
Spin-off activity or company
Public research and/or education
Founds, initiates …
Other public organizations
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9. From the national industrial heartland towards a node in the global knowledge economy: The case of Tampere Region* Mika Kautonen, Pasi Koski and Gerd Schienstock 9.1
INTRODUCTION
Numerous studies on the dynamics of firms and industries have been carried out in which variables like technological research, capital investment, corporate organization, labour skills, macroeconomic policy and many others have been exhaustively examined in an attempt to determine firm and industrial performance. As a result, a vast body of important insights has been accumulated. With some minor exceptions, however, the problem as to whether or not firm and industrial performance might also somehow be grounded in geography and location has been mostly overlooked (see for example Scott 1998). This is somewhat surprising for several reasons. First, a considerable proportion of total world output of particular goods is produced in a limited number of highly concentrated regions. Second, firms in particular industries, or firms that are technologically or otherwise related, tend to locate in the same place and form geographically bounded agglomerations (Porter and Sölvell 1998, p. 441). Third, both of these phenomena tend to be persistent over time – even in the case of new knowledge-intensive industries, in which firms are usually highly capable of exploiting the full state-of-the-art possibilities of information and communication technologies. In fact, the local and regional levels seem to increase in importance compared to the national level, as far as innovation processes are concerned. This is due to, for example, EU policies, increased regional endogenous development actions also facilitated by these policies, as well as multinational companies (MNCs) searching for suitable investment locations, in addition to agglomeration advantages, mentioned above. However, this process of regionalization favours those regions that are capable of providing an environment with embedded resources that are valuable, rare, difficult to imitate, and/or hard to substitute (see Barney 1991). 169
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Such an environment may be a source of competitive advantage for existing firms belonging to its networks, and provide a seedbed for new firms to emerge. Therefore, the regional dimension is relevant in a global economy for firms’ innovative activities especially due to the following reasons (see Howells 1999; Lundvall and Borrás 1998; Porter and Sölvell 1998): • formal and informal contacts between network members are made possible through casual information exchanges, planned meetings and customer-supplier relationships • synergies can emerge from the shared cultural, psychological or political perspectives of actors engaged in the same specialization • a localized pool of specialized expertise and knowledge for a certain industrial cluster may contain a considerable amount of tacit knowledge difficult to transfer to other localities. Tampere Region represents a remarkable case of a renewal that is turning the former industrial heart of Finland into a visible node in global knowledge production (see also Kostiainen and Sotarauta 2002). The core idea of the regional strategy is based on Castells’ notion of ‘space of flows’ (1996). The regional government’s ambitious aim is not only to keep the region as a centre of the national ICT cluster, but also to develop it into an independent node in the global knowledge economy and to integrate it tightly into global information and knowledge flows. This chapter analyses the spatial dimension of the knowledge economy from the Finnish viewpoint. First we briefly discuss the increasingly uneven regional development in Finland, with only a few centres of rapid economic growth, including Tampere Region. Next we give an overview of the socioeconomic structure and development strategies of the region. The focal point of our chapter is the transformation process towards a regional knowledge economy. We first describe the creation of the knowledge base of the region. We then analyse the structures and institutions related to the diffusion and intermediation of knowledge in Tampere Region. Next we deal with companies’ capacity to adapt to and make use of the regional knowledge base. We also discuss some problems related to the emergence of the regional knowledge economy, as this process is not a positive-sum game. Finally we sum up our notions and discuss the existing and prospective challenges in Tampere Region.
9.2
GROWTH AND UNEVEN REGIONAL DEVELOPMENT IN FINLAND
One of the most significant phenomena in post-recession Finland is the coexistence of the remarkable growth of knowledge-intensive industries,
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especially ICT, and the rapid acceleration of uneven regional development (Valtioneuvoston kanslia 2000). Figure 9.1 shows how production, employment, and R&D investments accumulated to a great extent in 1995–99 within a few large cities with universities and large research and development facilities or within cities specialized in the production of information and communication technologies. The former include the city-regions of Helsinki, Tampere, Oulu, and to some extent those of Turku and Jyväskylä. In the latter case, the small town of Salo with the large production facilities of the Nokia Group is especially worth mentioning. For many stagnating regions based on traditional industries with low expectations of employment growth, the accumulation has been a very serious problem because they are already sparsely populated. These regions also often suffer from problems with the ageing of the population, as the young generation tends to move to larger cities for education or employment. However, the prospering city-regions are not without problems either. In most cases, they suffer from relatively high structural unemployment due to
Real growth of GNP, 1995–1999, % > 20 10–20 0–10 <0
Change in jobs, 1995–1999, % 0–5 <0
15 – 10 –15 5 –10
R&D costs, EUR/inhabitant whole country = 100 1.6 –16.5 –1.5
46.6 – 31.6–46.5 16.6–31.5
Sources: Original data by Statistics Finland, compiled by the National Technology Agency Tekes (2001) with technical modifications by the authors.
Figure 9.1
Selected indicators of regional development in Finland, 1999
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high losses of employment in traditional industries during the recession of the early 1990s. These regions have also attracted job-seeking migrants from stagnating regions, which has maintained the unemployment rates on a rather high level even during the period of significant job creation in the latter part of the 1990s (Valtioneuvoston kanslia 2000). There is a mismatch between the supply of human capital with relatively low qualifications and the demand for newly acquired ICT-related skills.
9.3
SOCIOECONOMIC STRUCTURE AND DEVELOPMENT OF TAMPERE REGION
With its 445 000 inhabitants, Tampere Region is Finland’s second largest region after Helsinki Region (with approximately 1 300 000 inhabitants). About 9 per cent of the Finnish population live in Tampere Region. Within the Central Tampere Region, the population is approximately 300 000. The number of employed people is 200 000, which is roughly in proportion to the region’s share of the Finnish population. The City of Tampere is clearly the second major economic centre in Finland after Helsinki and its surroundings. The total Gross Regional Product per capita (GRP) for Tampere Region was 16 600 euros in 1997 and 19 200 euros in 1999 (Finnish Ministry of the Interior 2001, Statistics Finland 2002), which indicates the rapid economic growth that occurred during the last part of the 1990s. However, this growth has concentrated to a large extent in the central urban region of Tampere, while some parts of the region have such structural problems that they belong to the EU Structural Fund areas. The breakdown of the workforce by sector clearly highlights the industrial nature of the region. The pattern is of course largely the same as in all industrialized areas: a declining agrarian sector (3.4 per cent of workforce in 2000), a stagnating or declining industrial sector (33.4 per cent) and a growing service sector (61.3 per cent). However, the process of deindustrialization on a large scale started rather late in comparison with the rest of Finland. Nonetheless, in 2000 the industrial sector was still much bigger in Tampere Region than in the rest of the country; in contrast, the service sector in this region is smaller, in relative terms, than in Finland as a whole. Tampere Region accounts for some 11 per cent of Finland’s total output. In 2000 the region’s manufacturing firms exported 58 per cent of their total output, while the figure for the whole country was 53 per cent. There are about 21 000 firms and plants in Tampere Region, of which nearly 3200 are industrial companies. About 650 of them operate globally, and a dozen of them are world
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market leaders in their niches. Nevertheless, the great majority of firms in Tampere Region are small. The most important industrial agglomerations in Tampere Region are the ICT sector, the pulp and paper industry and mechanical engineering, which altogether account for nearly 60 per cent of the total value of industrial production. Concerning employment, the pulp and paper industry and mechanical engineering have been fairly stable during recent years. Major growth has come from the ICT sector: it has shown annual growth rates of about 30 per cent in its employment (O’Gorman and Kautonen 2001), although this trend slowed down at the turn of the millennium because of the end of the ICT boom. The most important employer in the ICT sector, the Nokia Group, employed approximately 3600 white-collar workers in its R&D-related functions in 2001. The textile and clothing industry, which used to be the heart of the local industrial structure, has declined quite dramatically over the past two decades and now represents less than five per cent of total employment. Figure 9.2 gives an overview of the contribution of the various sectors to industrial production in Tampere Region. Compared with Finland as a whole, Tampere Region is still an important industrial centre. The region has the largest textile industry in the country, but it also accounts for a large share of total production in the clothing industry, rubber and plastics industry, mechanical engineering, motor vehicles and
Medical eqt Textiles, clothing Glass, clay, stone Printing and publishing Wood products Food, beverages Metal products Rubber and plastics Electrical eqt Pulp and paper Machine-building
value added workforce
0 Source:
5
10
15 %
20
25
30
Statistics Finland (2002)
Figure 9.2 Industrial production in various sectors in Tampere Region in 2000 (%)
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transport equipment industries, as well as in the electronics and telecommunications sector. In 1995–2000, with only minor differences, changes in the industrial production in the region have been very similar to those in the whole country, ranging from –1 to +2 per cent in relative shares (see Figure 9.3). A striking exception was the electronics sector with its 4 per cent increase in the workforce and more than 10 per cent increase in value added between 1995 and 2000.
Electrical eqt, etc. Machine-building Chemicals, oil, rubber, plastics Wood, pulp and paper workforce value added
Total manufacturing –4 Source:
–2
0
2
4 %
6
8
10
12
Statistics Finland (2002)
Figure 9.3 Changes in Tampere Region’s share of workforce and value added, of Finland as a whole, 1995–2000 (%)
9.4
TOWARDS A REGIONAL KNOWLEDGE ECONOMY
After the Second World War, Tampere developed into a versatile industrial city, where alongside the traditional textiles and clothing industries considerable pulp and paper, metal and chemical industries also existed. However, due to the problematic relationships between local government and industry at the beginning of the 1970s, many major companies moved to neighbouring municipalities or further away, where they could benefit from different grants provided in more peripheral regions (Kautonen et al. 2002; Seppälä 1998). At the same time, the oil crisis caused a stagnation that resulted in a significant loss of employment in the city and the unemployment rate increased to 12 per cent in 1977. These problems, however, led to tightened links and increased cooperation between local government and industry. After their establishment at
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the end of the 1960s, both the University of Tampere and the Tampere University of Technology began to contribute to the knowledge base of the region. At the beginning of the 1980s it became clear that because of increasing global competition, a streamlining of traditional industries would become inevitable and that this would lead to significant job losses: ‘... the old will be renewed as far as possible, and dying occupations and jobs will be replaced by something new that has never ever existed yet’ (Seppälä 1998, p. 230) became the motto of the regional industrial policy. Based on this thinking, key economic actors of the region agreed in 1983 on the following measures, among others, as strategic means to facilitate modernization (ibid.): • the establishment of close co-operation between universities, industry, and municipalities to develop industries based on new technology • the foundation of a science park • the setting up of a regional business development and venture capital company • the encouragement of initiative, creativity, and entrepreneurship by supporting measures in education, training and mentoring activities. In 1985, soon after the setting of these strategy guidelines, the City of Tampere, the Tampere University of Technology and the University of Tampere, in co-operation with the regional industries, established a Research Institute of Information Technology (later the Digital Media Institute), which was to become one of the cornerstones of developing the knowledge base in the ICT sector. At the same time, the Technical Research Centre, VTT, also started its first units in Tampere. In 1986, both a technology transfer company, Tamlink Ltd, and a host organization of the science park, Tampere Technology Centre Ltd) were established. The Nokia Group set up its first local research unit in the following year. Thus, just before the deep recession of the 1990s, the core of the institutional setting related to knowledge creation and innovation processes already existed. The recession at the beginning of the 1990s had hit Tampere Region even more than the Finnish economy as a whole. But the pulp and paper industries, as well as the mechanical engineering and automation industries in the region, recovered relatively easily. Because large key companies managed to raise their international market shares to a considerable extent, the high unemployment rate in the region decreased quite substantially. On the other hand, the already relatively small traditional textiles and clothing industries declined even more. However, new industries emerged to replace them: rapid growth occurred especially in the new media, software and business services sectors – partly due to the outsourcing activities of the large companies, but partly also due to new demand and new businesses established in these fields (Kautonen et al. 2002).
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After the mid-1990s, the regional government continued to develop the innovation support infrastructure. New co-ordinating organizations on the local and regional level were established because of Tampere Region’s participation in the new nationally initiated Centre of Expertise Programme from 1994 on, and because of access to the EU Structural Funds from 1995 onward. Furthermore, thanks to its two large universities, VTT’s research facilities and especially R&D-intensive companies, the city-region of Tampere benefitted greatly from the R&D programmes of the National Technology Agency (Tekes), the research programmes of the Academy of Finland and the framework programmes of the EU. According to the key policy-makers, innovation policy in Tampere Region has in recent years had two main aims (Kautonen et al. 2002, pp. 168, 173–5). The first is to maintain and strengthen the diversified and versatile industrial and technological base of the region, which can be seen as an important resource for continuous innovation activities in different sectoral and technological interfaces. In connection with this aim, a strong educational and research infrastructure is seen as crucial in integrating large firms into the regional economy. The second aim is to develop the social and cultural amenities of the region in order to maintain its attractiveness to a highly qualified workforce. Recent nationwide polls and surveys have shown that Tampere is currently the most attractive urban centre in Finland into which to migrate. Tampere Region seems to be able to sustain positive development also during the present stagnation phase. Based on a recent study on the innovation policy of Tampere Region (Kautonen et al. 2001), the main positive developments in which the policies have had an impact concerned the following, partly intertwined matters: • the emergence of new industries of which the most important is a versatile ICT sector • the strengthening of traditional industries, including mechanical engineering and automation, by becoming more technology-intensive • the widening of the regional knowledge base • the internationalization of a significant number of regional companies • the establishment of economic networks, facilitating innovation activities and learning.
9.5
ELEMENTS OF THE REGIONAL KNOWLEDGE ECONOMY
So far, we have briefly presented how the industrial structure in Tampere Region has been transformed towards more knowledge-intensive industries, in line
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with a few other leading regions of Finland. We have also sought to argue that the socioeconomic development of Tampere Region has been very favourable compared to most of the other regions of the country. And we have described a shift in the regional industrial strategy towards policies supporting industrial innovation activities. In the following we analyse the main elements of the regional knowledge economy in their recent state of affairs in order to gain understanding of the environment for creating, diffusing, and using scientific and technological knowledge in its regional setting. Some critical remarks related to the knowledge economy are then presented. 9.5.1
Creation of the Knowledge Base
The two universities and other higher education institutions form the backbone of the regional innovation system, together with large R&D-oriented companies. Tampere has a strong, indigenous science and technology base, which matches the needs of industry due to a long tradition of university-industry co-operation and areas of high-level research conducted in the local universities (see also Jones-Evans 2000). In addition, the region has many private and public research laboratories and a number of educational and training institutions, including polytechnics. Key policy-makers in Tampere Region consider the production of new scientific and technological knowledge to be the most important stronghold of the innovation support system, followed by the education and training of a highly qualified workforce (Kautonen et al. 2002). Of the two universities in the region, the Tampere University of Technology (TUT) has traditionally been a key actor in the regional innovation system. TUT has won nominations as a Centre of Excellence in Research in the fields of semiconductors, digital signal processing, hydraulics and automation for the period of 2000–2005. In all these fields of research, TUT has a long-standing tradition of co-operation with industry in the region. University-industry cooperation has been partly achieved through high labour mobility. Furthermore, students have written their Master’s theses in co-operation with firms and university staff have provided training courses for firms. University initiatives, such as part-time professorships for experts from industry, also indicate close university-industry co-operation in the region. And a major part of the university’s research activities – about 60 per cent – is financed externally, including financial support from industry. About 45 per cent of all the students are studying in the faculties of information technology and electrical engineering, which are both very closely related to the ICT sector. TUT, situated in the Hermia Science Park, where the Nokia Group and approximately 150 smaller firms have also located their R&D activities, has 1850 employees and 10 000 students. From the 1990s, the university has been an important partner for the Nokia Group, in fields such as digital signal
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processing (Ali-Yrkkö and Hermans 2002). For example, about half of the Master’s theses written in the Software Systems Laboratory are produced in close co-operation with Nokia. During the 1990s, the University of Tampere (UTA) also raised its regional profile. The University of Tampere, with its 1600 employees and 13 000 students, had traditionally been oriented towards the humanities and towards educating a workforce for the public sector, whereas university-industry cooperation had developed only in the medical faculty. During the 1990s, computer science and information sciences, as well as hypermedia, also became important fields of co-operation, which was one of the reasons for establishing a new Faculty of Information Science in the university in 2001. Concerning the ICT sector, the Tampere University of Technology and the University of Tampere together grant more than 200 Master’s degrees annually in the fields of electronics, information and communication technologies, and new media. The two universities in Tampere also played a crucial role in the emerging ICT sector, as researchers established some of the first companies in the field. VTT, Finland’s main public research centre of technology, is well represented in Tampere Region. Its strengths overlap to a great extent with those of TUT: automation technology, as well as information and telecommunication technologies. VTT specializes in applied research, concentrating on improving product and process technologies. Most of its research projects are commissioned by private companies or state-owned institutes, Tekes in particular, but the VTT institutes are also engaged in self-initiated research projects. Of VTT’s nine research areas in Finland, five are present in Tampere: mechanical automation, construction, plastic and fibre technology, security technology and metallurgy, and information technology. VTT has 250 employees in Tampere. There are numerous educational and training institutions in Tampere Region, including two recently established polytechnics: Pirkanmaa Polytechnic, concentrating on social and health care sector education; and Tampere Polytechnic, concentrating on fields such as business administration, engineering, and information technology. There are also quite a few vocational training institutions in Tampere Region. This institutional knowledge base represents an excellent source for local companies, as intensive co-operation between knowledge-creating institutions and industry indicates. Figure 9.4 shows to what extent companies in the region engage in close co-operation with key knowledge producers. Altogether, approximately 80 per cent of the manufacturing and knowledge-intensive business service companies that employ ten or more persons have at least some co-operation with these organizations. As mentioned earlier, Nokia, the core company in Finland’s highly competitive telecommunications industry, forms an important part of the private
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Tampere Univ. of Technology VTT Other Finnish univ. or res. institutes Tampere Polytechnic Univ. of Tampere Foreign univ. or res. institutes 0 Source:
5
10
15 % of firms
20
25
30
Kautonen et al. (2002)
Figure 9.4 Share of companies having frequent (Likert-5, values 4–5) cooperation with some selected universities or research institutes (N=195) sector’s knowledge base in Tampere Region, because one of its largest research centres is located there. Due to this focus on R&D, Tampere Region has significantly benefitted from Nokia’s strategy to systemically improve its innovation capabilities in Finland by continuously increasing its R&D budget. The company’s researchers frequently co-operate in joint projects with their counterparts from universities of technology and other research institutes. In addition, Nokia engages in strategic R&D partnerships not only with leading large companies in the telecommunications business, but also with small hightech firms, allowing the company to closely monitor new technological developments in Finland (Schienstock and Tulkki 2001). In Tampere Region, the growth of R&D investments has been remarkable: the real annual change during 1995–1999 was as high as 25 per cent compared to the national level of 14 per cent. In 1995 R&D expenditures in Tampere Region only accounted for about 10 per cent of Finland’s entire R&D expenditures. Nowadays expenditures in R&D in the region, which have been growing particularly in the business sector, represent a share of about 14 per cent of national spending (Statistics Finland 2001a). Nevertheless, Helsinki Region, with its share of 45 per cent, strongly dominates R&D expenditures. Concerning the regional proportion of R&D personnel of the workforce, Tampere Region also has a strong position. While on average 3.1 per cent of the workforce are engaged in R&D-related jobs, Tampere Region has been able to raise this share
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to 4.6 per cent (Statistics Finland 2002). In this respect it is the most dynamic region in Finland. Contrary to other regions, Tampere Region increased employment in R&D in both the public and the private sectors (see Figure 9.5).
Finland Oulu Turku-Salo Total University Public Business
Tampere Helsinki –6 Source:
–4
–2
0 %
2
4
6
Statistics Finland (2002)
Figure 9.5 Changes in R&D expenditure shares by region between 1995 and 2000 (%)
Patent applications represent an important indicator when measuring the outcome of R&D inputs. Helsinki Region has been the strongest with 34 per cent, whereas Tampere Region holds second place with its 17 per cent share of the national total in 2001 (Statistics Finland 2002). It is also important to notice that the share of Tampere Region is higher in patent applications than its share in R&D expenditures (14 per cent) and R&D personnel (13 per cent). According to Statistics Finland (2001), the largest patent classes in the region are electrical engineering (32.4 per cent), processes and transport (18.8 per cent), and physics (15.7 per cent). The fairly even distribution of patenting activities among the various sectors reflects the widely diffused science and technology base of the region (see Figure 9.6). 9.5.2
Knowledge Diffusion: Bridging Institutions
The municipal sector in Finland has remarkable autonomy guaranteed by legislation, which has opened up opportunities for an independent innovation
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45 40 35 30 25 % 20 15 10 5 0
Helsinki
Tampere Turku-Salo Oulu 1995
Source:
181
1998
1999
2000
2001
Statistics Finland (2002)
Figure 9.6 Domestic patent applications filed by business enterprises in Finland by inventor’s address by region 1995–2001 (%) policy on the regional level. Since the early 1970s, when municipalities established positions for industrial advisors, the municipal and subregional authorities have gained the power to support the setting up of new companies by founding science and technology parks, other intermediaries, and regional venture capital funds. Most of these institutions are partly in public ownership. Most intermediaries and technology transfer companies in Tampere Region are located in close proximity to TUT and VTT in Hermia Science Park and in the newly established Finn-Medi Science Park. The latest high-technology agglomeration has developed in the centre of the City of Tampere, where the large, old industrial estates have been turned into a complex of software and new media companies. This sector is co-ordinated by Media Tampere Ltd – a company that is mostly owned by private companies like Nokia and Fujitsu Invia. This commitment reflects the fact that these companies aim at using the city as their testing arena for new products and applications and as a seedbed for new business ventures, especially in the field of mobile and Internet technologies (Kautonen et al. 2002). In the ICT sector, several new institutions have been established to take up a bridging function between knowledge-producing institutions and industry. These include large research facilities such as Digital Media Institute and the Optoelectronics Research Institute. Several bridging institutions are also located in the mechanical engineering and automation sector, including the Tampere Automation Centre, the Foundry Institute and the Rubber Institute. These institutes bring together firms, education and training institutions and other core actors representing certain fields of technology and expertise and they offer
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specialized services like training and technology transfer. Also many largescale joint investments have been made that would otherwise have been too costly for any single company to finance (such as in research facilities and pilot and prototype production equipment). With respect to innovation support and financing, regional branches of state authorities have the most widely distributed clientele among companies in Tampere Region. These include the National Technology Agency (Tekes), the regional Employment and Economic Development Centre of Tampere (EEDC), and Finnvera. Tekes provides funding in the form of R&D grants and loans for single companies. Tekes also initiates, co-ordinates, and finances large national technology programmes in which usually universities, research laboratories and industry participate. In 1999, Tekes financed company R&D in Tampere Region totalling 22 million euros (9 per cent of the national total) and in the same year its support for R&D in universities and public research institutes totalled 67 million euros (15 per cent of the national total). Regional Employment and Economic Development Centres (EEDCs) were established in 1997 to bring together regional offices that are under the administrations of the Ministry of Trade and Industry, the Ministry of Labour and the Ministry of Forestry and Agriculture. One of these regional centres is located in Tampere. They provide companies with (1) advisory services; (2) training, consultancy and development services; (3) sector-specific information services; and (4) financial services. The latter include grants for development activities, investments, internationalization and for developing the operational environment of SMEs (incubators, technology transfer, and so forth). The EEDC in Tampere Region had 10.1 million euros for its operations under the administration of the Ministry of Trade and Industry in 2001 (excluding, for example, ESF funding for employment measures). Finnvera plc is a state-owned export credit agency with 15 regional offices that operates throughout Finland. Its role as a financier of SMEs includes providing loans, guarantees and risk financing for growing and internationalizing companies. It concentrates on financing in manufacturing industries, tourism and various business services and providing short- and longterm loans for SMEs. In 1999, Finnvera spent altogether 72 million euros (15 per cent of the national total) for various activities in Tampere Region. Altogether, state industrial policy financing for Tampere accounted for 185 euros per capita (120 euros on average in Finland) in 1999. Tampere Region’s share of national technology policy financing was even larger: in 1999, the financing was 145 euros per capita, whereas the national average was only 75 euros per capita. In particular, financial support coming from Tekes increased faster in Tampere Region than in any other region of the country during the late 1990s. Compared to this financing based on competitive bidding, Tampere Region’s share of EU structural funds was only 3.4 per cent of the national total.
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In addition to public financing for existing companies and their R&D, the availability of venture capital expanded rapidly during the 1990s, facilitating the setting up, growth and internationalization of knowledge-intensive small firms in Finland. A major regional venture capital company, Sentio Invest Ltd, was established in 1996, partly owned by the City of Tampere and Finnvera plc. In 2000 Sentio Invest Ltd disposed of a total capital of over 15 million euros to invest in companies in Tampere Region, in general in the form of a limited partial ownership contract during the first years of a company. In addition, a private-public consortium was established in 1998, backed up by the National Fund for Research and Development (Sitra), among others. This consortium concentrates its support on pre-venture capital funding stages. Together with other financiers, the consortium invested some 8 million euros in 2000. The City of Tampere itself either finances or owns a number of companies and establishments, like the Tampere Technology Centre Ltd and Hermia Science Park, new regional funds, the Finn-Medi Medical Technology Centre, the Centre of Expertise Programme, the Tampere Polytechnic and others, or is a shareholder in them. In 2001 the City of Tampere also spent about 4 million euros to finance business development programmes directly (Kautonen et al. 2002, p. 159). Instead of physical infrastructure, the focus of public funding in Tampere Region has been on industrial development in terms of innovation activities and enhanced qualification of the workforce. The National Technology Agency (Tekes), the regional EEDC, and Finnvera are the three most important public innovation support organizations for companies. Approximately 20–30 per cent of the companies in the region have fairly or very frequently co-operated with these three organizations (Figure 9.7). Local and regional agencies are more specialized in particular fields of industry or technology and therefore deal with a smaller number of customers. Intermediaries, such as regional venture capital funds and technology transfer organizations that host science parks, in general co-operate with no more than 5 to 10 per cent of the regionally based companies (Kautonen et al. 2002). In contrast to the regional offices of national organizations, the focus of these intermediaries’ activities is on co-ordinating and networking instead of financing. Thus, there is a fairly clear division of responsibility between national and municipal organizations, in which the latter take care of ‘innovation awareness’, network formation and capability-building, initiating new businesses, and developing regional innovation and growth strategies. Of all the companies in the region, approximately 85 per cent have at least infrequent co-operation with one or more public innovation support organizations (ibid.). Despite the relatively non-interventionist industrial policy that has traditionally been pursued in Finland, there have been intensive public initiatives and activities intended to support the development of the ICT cluster in particular. So far the ICT industry has been a cornerstone of industrial renewal
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Regions and institutions Tekes Tampere Region EEDC Finnvera Finnpro
Municipal business development agencies Science park host organizations Sitra Technology transfer companies Regional venture capital companies/funds Other venture capital companies/funds
0
Source:
5
10
15 20 % of firms
25
30
Kautonen et al. (2002)
Figure 9.7 Share of companies located in Tampere Region having frequent (Likert-5, values 4–5) co-operation with selected intermediary and financing organizations (N=195) in Tampere Region. According to an evaluation of the Centre of Expertise Programme (Finnish Ministry of the Interior 2002), besides mechanical engineering and automation as well as health care technologies, the core expertise in firms and supporting organizations of Tampere Region lies in the following areas: ICT-based industries, new media and knowledge-intensive business services. This is explored in more detail in the following sections. In ICT-based industries, operations of the regional firms and business units focus on research, design and product development. The leading expertise of the Tampere Region ICT sector is in such areas as data communications, wireless networks, telecommunications networks, workstation software, team software, databases, mechatronics, process automation, sound-, image- and video-processing, production control and logistics systems. Tampere Region has nearly 300 ICT firms and business units employing some 8500 people. The regional Centre of Expertise Programme aims to double the current number of jobs in the sector by the year 2006. In new media industries the specific strengths in the communications sector are digitizing and mobile communications, digital content and distribution services, new media industries and the social impact of new communications technology. The media services operations of the Centre of Expertise cover a field employing a total of about 5100 people. The projected turnover for the
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programme period is 915 million euros and the target number of jobs in the sector is 7600. Particular attention will be given to new media content production and services. In 1998, Tampere Region initiated a fifth sub-programme supporting the development of knowledge-intensive business services (KIBS). This subprogramme is seen as important not only because of the rapid growth of employment taking place in this field, but also because it is believed to have a significant impact on the innovation activities of other industrial sectors, as KIBS companies may play an important role as creators, carriers or disseminators of new knowledge (Miles et al. 1995). A new company, Professia Ltd, was established to co-ordinate the programme in this field. The Tampere Region Centre of Expertise Programme functions as a catalyst in promoting new developments and bringing different actors together. It also acts as a mediator between national-level financiers on the one hand and service suppliers and local firms on the other. The development projects co-ordinated by the programme aim to cover all the technological, market and social factors that are relevant to business success. In addition to development projects carried out with firms and networks of service organizations, the programme also intends to identify gaps and weak linkages in the regional system of innovation and to propose possible solutions (O’Gorman and Kautonen 2001). Figure 9.8 shows the expansion of the industrial sectors belonging to the regional Centres of Expertise Programme. The ICT sector and the knowledgeintensive business services sector have been growing the most rapidly. In the ICT and KIBS sectors, the total turnover of companies more than doubled between 1995 and 2000. However, in 2001 the growth came to a halt due to the international stagnation of the global ICT boom. It remains to be seen whether the third generation of mobile telephony will create a new growth wave. In the mechanical engineering and automation sector, modes of production evidently became more knowledge-intensive: This is indicated by an increase in R&D spending and the substantial growth of productivity during the latter part of the 1990s. It can also be seen in the technological level of the companies and their products (Kautonen et al. 2002, p. 157). In 2001, the eTampere Programme was launched to broaden and expand the ICT and the New Media Centres of Expertise in the region. Because of its large budget of 130 million euros for five years, the programme is considered to be very ambitious. But also because it consists of a great number of subprogrammes covering a wide range of activities from basic and applied research to business incubation and further to the development of information society citizenship, the programme can be seen as a major challenge for all actors involved. The programme covering technological, market and social aspects is seen as unique not only in Finland but also in Europe (Castells and Himanen 2001). Within the programme, new virtual units have been set up, including
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New media Mech. eng. & autom. ICT KIBS Health care tech.
250 200 150
Source:
11 2000
04 2000
09 1999
02 1999
07 1998
12 1997
05 1997
10 1996
03 1996
50
08 1995
100 01 1995
Index (1995 = 100)
300
Statistics Finland, Tampere Cityweb statistics (2002)
Figure 9.8 Development of total turnover in industries belonging to the Tampere Region Centre of Expertise Programme, 1995–2000, index the eBusiness Research Centre connecting TUT and UTA, the Information Society Research Institute at UTA and the ReLab of VTT (including testing and applications). As part of the eTampere Programme, a sub-programme referred to as eAccelerator was launched. It is based on the concept of a virtual, highly efficient business incubator oriented towards new technology-based companies. Its rather ambitious goal is to guide 20–25 companies into international growth trajectories. This goal has not been formally re-examined because of the international stagnation of the ICT sector, although it is clear that the weakening of the US venture capital market specifically has made it much more difficult to attain such growth. 9.5.3
Knowledge Use: Towards Organizational Networks
Regional companies are the main users of the knowledge produced and diffused within Tampere Region (see Figure 9.9). While Tampere Region accounts for a significant share of industrial production in Finland, only two of the 100 largest companies in Finland have their headquarters there: GNT Finland (wholesale trade, IT products) and Nokian Tyres. This could become a problem for the region, as key decisions concerning R&D and production strategies as well as new investments are often made at headquarters. The ten biggest employers in Tampere Region in 2000 represented the following industries:
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From the national industrial heartland KNOWLEDGE PRODUCTION AND ITS COMMERCIAL APPLICATION AND EXPLOITATION
Education and training TUT, UTA Tampere Polytechnic Pirkanmaa Polytechnic Vocational institutes Private educ. and training Financing EEDC, Tekes Finnvera Cities and municipalities Regional council Sentio/regional VC funds OKO consortium Private banks and investors
Intermediary organizations Tampere Technology Centre Finn-Medi Research Media Tampere Tamlink Professia Sectoral/technology institutes Ensimetri start-up service Trade/business associations etc. Major programmes eTampere Programme Centre of Expertise Programme ESF and ERDF Programmes National S&T programmes EU S&T programmes Other programmes
Regional innovation policies
KNOWLEDGE PRODUCTION AND DISSEMINATION, RESOURCING OF INNOVATION ACTIVITIES IN TAMPERE REGION Science and technology Tampere Univ. Technology Univ. of Tampere VTT Firms’ R&D units
187
Largest private manufacturing and service firms Nokia Group ICT 3700 empl. UPM-Kymmene forestry 3110 M-Real Group forestry 2900 Metso Group engineering 2180 Patria Industries engineering 1650 Partek engineering 1630 Artekno-Saarioinen food 1550 Nokian Tyres rubber 1400 Pilkington Lamino special glass 1050 Alma Media media, publishing 870 Soon Communications telecom 790 Engel Services producer services 720 Tamfelt industrial textiles 690 Sandvik Tamrock engineering 640 Nordea finance 590 Sonera telecom 510 Flextronics electronics 510 Instrumentointi electronics 490 Kvaerner-Pulping engineering 490 Fort James Finland forestry 440 SMEs
National innovation policies Ministries, Tekes, Sitra, Finnish Industry lnvestment, universities, research institutes private companies and associations, trade and labour organizations etc.
EU and other international innovation policies
Source:
Kautonen et al. (2002), p. 159.
Figure 9.9
The regional innovation system environment in Tampere Region
metal industries (three companies), forest industries (two companies), and the rubber, chemical, graphic, food and electronics industries (one in each industry). Concerning the traditional industries, paper production and processing is still very strong in the region. But companies in this industry have further developed into knowledge-based organizations, because they have specialized in products of higher value added. There are a number of relatively large firms manufacturing paper products in the region. The biggest production units are owned by UPM-Kymmene and M-REAL. The region’s machine-building industry still plays a major role in the Finnish metal industry. There are a total of some 400 companies engaged in mechanical engineering and automation in the region, with a combined turnover in excess of 1.7 billion euros. These companies employ nearly 20 000 people. Many companies have strong positions in global markets: Bronto Skylift, Sisu Terminal Systems, Metso Minerals,
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Sandvik-Tamrock, Timberjack, and Neles Automation. The rubber, chemical and plastics industries are also quite significant branches in Tampere Region, but this is largely on account of one single operator, Nokian Tyres. Electronics and telecommunications have been growing very rapidly in Tampere Region, where in less than five years the ICT sector more than doubled in size. In 1996, there were a total of 170 ICT firms operating in the sector, employing 5200 people, with a total turnover of 770 million euros. By 2000, the turnover had doubled, totalling 1.5 billion euros. Employment increased from 3000 in 1994 to 6800 in 1997, a growth of 125 per cent (Tampere Region Centre of Expertise Programme 1998). By 2000, the ICT sector in Tampere employed approximately 10 000 people, and if the media and new media subsector and the related services and commerce sub-sector are included, employment totalled 15 500 people (Statistics Finland 2000). Nokia with its various business units has accounted for over half of all the growth in the ICT sector. But in the late 1990s, nearly one hundred new business ventures were also established. Growth in employment in this sector, however, is either related to new business units established by firms having their headquarters elsewhere, or to the expansion of already existing firms rather than to the establishment of new firms. The ICT sector in Tampere Region is characterized by a very diverse and versatile structure (Kautonen et al. 2002; O’Gorman & Kautonen 2001), which ranges from electronics and telecommunications production and R&D (Nokia) to telecommunications operation and services (Sonera, Soon Communications) to software and information system design and production (Fujitsu Invia, Tietoenator and SecGo) and further to the Internet and other new media content production (TV2, Alma Media). A significant number of companies in Tampere Region have been very active in transforming themselves into learning organizations. A recent comparative study (Schienstock 2002) including eight European regions1 revealed that companies in Tampere Region were leading with respect to the introduction of group work, flat hierarchies, profit centres and supplier networks – the key dimensions that enable organizational learning. They were also very intensive users of network technology such as LAN and advanced communication technology, which are tools for accelerating information and knowledge flows. It is important to mention that user involvement in introducing and developing ICT was highest among companies in Tampere Region, which can be seen as indicating a trust-based organization culture. Particular emphasis has been given to the high demand for management and organization competencies as well as communication skills. Besides restructuring internally to enable organizational learning, companies in Tampere Region are increasingly influenced by the network logic of organizing business. Table 9.1 shows the
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extent to which different types of inter-firm networks are diffused in the economy of Tampere Region. Table 9.1 Types of innovation networks among firms in Tampere Region (%) Type of innovation network
Share of firms
No significant innovation networks Inter-firm innovation networks along vertical production chains* Both vertical and horizontal inter-firm innovation networks Innovation networks consisting also of university units or research laboratories as members Other types of innovation networks** N=223 * **
15.2 35.9 19.7 17.5 11.7 100.0
A company’s customer(s) and/or supplier(s) are involved in key stages of its new product or process development In addition to inter-firm relationships, this category of innovation networks consists also of co-operation with polytechnic(s) or other educational institution(s) (other than universities) or with public innovation support organization(s).
Source:
Kautonen et al. (2002)
Qualifications of personnel Quality of product or service Flexibility Innovativeness of product or service Time and security of delivery Distribution network, after-sales services Ecologically advanced Price
0 10 20 30 40 50 60 70 80 90 100 % of firms Source:
Kautonen et al. (2002)
Figure 9.10 Companies’ views of their own competitive strengths in Tampere Region (N= 245)
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Companies in Tampere Region mention a highly qualified workforce as their stronghold. Product quality, flexibility and innovativeness were also seen as major strengths by more than 50 per cent of the companies participating in a recent survey carried out in the region (Kautonen et al. 2002). With respect to price competition, companies in Tampere Region do not consider themselves to be in a strong position. These findings seem to indicate that many firms in Tampere Region have adapted to the new competition criteria in the globalizing economy (see Figure 9.10). We can conclude that companies in Tampere Region have improved their learning and innovation capacity significantly during the last ten years by introducing key elements of the network organization model. The use of network technology, organizational decentralization and functional integration, human resource development and participatory elements are nowadays much more common than they were a decade ago.
9.6
IN THE SHADOWS OF THE REGIONAL KNOWLEDGE ECONOMY
The transformation processes towards the knowledge economy are not a positive-sum game (Boden and Miles 2000). Actually this fundamental process of change produces winners and losers (Lash 1994; Schienstock 2001); a process of social exclusion within a society may progress rapidly. The point seems to be no longer a matter of being up or down but of being in or out (Touraine 1991). The economic crisis of the early 1990s had serious social consequences for Tampere Region as the unemployment rate skyrocketed to over 20 per cent. This crisis accelerated ongoing structural changes within the economy, with major job losses in the agricultural, manufacturing, construction and private service sectors during the early 1990s (see Table 9.2). Despite the positive employment trends in some of these sectors in the late 1990s, unemployment remained rather high in Tampere Region with an unemployment rate of over 10 per cent on average. A relatively large number of the unemployed have a fairly low education, they are somewhat older and their main work experiences relate to tasks hardly in demand today. They suffer from ‘skills mismatches’ that become more pervasive and general in this transformation period (Soete 1996). Their jobs often exclude them from information networks and they are prevented from participating in the learning activities associated with the new and more efficient use of modern ICT (Freeman and Soete 1994). As youth unemployment is also rather high in Tampere Region, many school-leavers never have the chance to
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be linked up with information networks and the associated learning potential. They are exposed to the risk that their skills and competencies become outdated very rapidly. Table 9.2 Changes in employment in different sectors 1970–1998 (%) (Tampere Region and Finland) Sector
1970–1993 1990–1993 1993–1998 Tampere Finland Tampere Finland Tampere Finland Region Region Region
Agriculture Manufacturing Construction Private services* Public services Total
–63.7 –38.2 –50.3
–61.3 –27.2 –40.6
25.8 –18.3
30.6 –10.4
–19.9 –27.7 –50.4 –28.9 –12.5 –20.1
–20.5 –26.4 –50.8 –29.0 –8.6 –19.5
–29.2 20.8 41.2 36.4 4.8 17.9
–26.7 18.4 35.6 34.1 –1.2 13.6
* in this sector, comparable data 1970–1993 were not available Source:
Statistics Finland (2000), Council of Tampere Region
While the high unemployment rate is truly a dark side of the emerging knowledge economy in Tampere Region, the increasing structuration of unemployment and the growing risk of becoming totally excluded from the labour market are even more worrisome. About 25 per cent of the unemployed were long-term unemployed in 2001 and among them about every second person had been unemployed for more than two years (Ministry of Labour 2001). Older workers were particularly affected, as about 60 per cent of the long-term unemployed were 50 years old or older. Among the older long-term unemployed about 50 per cent had only basic education, while the highly qualified people in the age group were hardly affected by long-term unemployment. The risk of becoming totally excluded from the labour market due to long-term unemployment was particularly high in the manufacturing sector.
9.7
DISCUSSION AND CONCLUSIONS
The post-recession era in Finland has shown a significant increase in uneven regional development. ICT-industry-related and large (technology-oriented) university cities especially have flourished, whereas regions with a more traditional industrial base have stagnated. Successful regional development is
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related to intensified university-industry co-operation, to the existence of other services and infrastructures suitable for new knowledge-intensive industries and to the supply of a highly skilled workforce. In this chapter we have demonstrated that Tampere Region has been quite successful in developing a new knowledge-based regional trajectory. Tampere Region is among the few regions in Finland that are favoured by the ‘new spatial logic’ of the knowledge economy. It has successfully combined resources and processes to build a strong knowledge base and has established an effective institutional setting to improve the diffusion of information and innovations. Furthermore, key companies of the region have been able to exploit this innovation environment to increase and support their competitiveness by developing new products and processes. Most visible is the strong growth of the information and telecommunications industry with a strong focus on R&D activities. Here the Nokia Group with its large research units in the region has led the way and facilitated the growth of an agglomeration in the ICT sector. The strong knowledge base in this sector has favoured a modernization process of the traditional industries, such as the automation and engineering industry. Also, the institutional setting in the region has adapted fairly quickly to the new development path. In particular, the Tampere University of Technology has become an important partner for industry in collective knowledge creation. Parts of industry and some science institutions have managed to become important nodes in the global knowledge flows – these include especially digital signal processing and wireless data transmission, biomaterials, and hydraulics and automation. What is essential is that these fields of science and technology match the core competencies of the key companies in the region. There is a strong link between regional developments on the one hand and global knowledge production on the other. Yet it is to a great extent open whether the universities and research groups have effective strategies with which to systemically increase their international co-operation. Furthermore, we may ask whether there exist enough such high-level research agglomerations at the two universities that are able to attract top international researchers, financiers and global firms in the region. Besides the strength in the knowledge creation process, some doubts can be expressed concerning the distribution power of the regional innovation system. The current transformation process, as mentioned earlier, cannot be reduced to the technical dimension only; it also involves fundamental organizational innovations to improve the diffusion of knowledge, indicated by the new network paradigm. There are some indications that knowledge flows between the emerging ICT cluster and the traditional industries are still hampered by organizational and cultural barriers. The regional government has been aware of these problems and has set up a centre of expertise in the field of KIBS in order to increase the diffusion power of the regional innovation system. Still a
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strong institutional setting to initiate and support organizational innovations seems to be missing. The comparatively high unemployment rate in Tampere Region and particularly the large share of long-term unemployed among the unemployed indicates that the development of the knowledge economy is not a positivesum game. It is more likely that together with the emerging knowledge economy the segmentation process within the labour force will actually increase. There is a need to integrate those policies that aim at supporting the technoorganizational change with policies that deal with the training and employment aspects of this process more closely. The regional EECD may function as a body that integrates the two policy areas. This task is obviously very demanding, but a segmented society with one third of the workforce becoming excluded from the knowledge economy is an alarming future vision. Tampere Region is a good example of a region that has within a relatively short period of time managed to renew its industrial base and institutional setting in a direction characteristic of a knowledge economy. It has experienced a significant shift from a national industrial heartland towards a globalizing knowledge-intensive agglomeration. This shift is at least partly based on conscious innovation policy to renew the industrial structure and to support co-operation within a regional and national innovation system. We may perceive it as an escape from path dependency because there are newly emerged actors in the ICT sector, connecting the region to the global knowledge flows. This evidence allows us even to speak about an international ICT node in certain areas of technological development. The question remains, however, whether the regional actors are able to find strategies to govern and to foster the evident internationalization processes. At the same time, the need for a balance between these ambitious aims and a wide social coherence of the region should be acknowledged.
NOTES * This chapter is based on research conducted in several projects, of which the authors wish to acknowledge the following: ‘Industrial Innovation and Region’, funded by the Academy of Finland under the Research Programme on Finnish Companies and the Challenges of Globalization (LIIKE); and ‘The International Dimension of the Finnish Science and Technology System (2001–2003)’, funded in collaboration with the Finnish Ministry of Trade and Industry and the National Technology Agency Tekes under the Research Programme for Advanced Technology Policy (ProACT). 1. The following countries/regions were involved in the research project: Flanders, the Republic of Ireland, Lazio (Italy), Lower Austria, Portugal, Stuttgart Region, Tampere Region and West London. The sample of the company survey contains 800 companies, 100 companies per region. The regional/national samples were structured according to company size and industry.
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REFERENCES Ali-Yrkkö, Jyrki and Raine Hermans (2002), Nokia Suomen innovaatiojärjestelmässä, Keskustelunaiheita No. 799, Helsinki: ETLA. Barney, John B. (1991), ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, 17, 99–120. Boden, Mark and Ian Miles (2000), ‘Conclusions: Beyond the Service Economy’, in Mark Boden and Ian Miles (eds), Services and the Knowledge-Based Economy, London and New York: Continuum, pp. 247–64. Castells, Manuel (1996), The Rise of the Network Society: The Information Age 1, Oxford: Blackwell. Castells, Manuel and Pekka Himanen (2001), The Finnish Model of the Information Society, Helsinki: Sitra and WSOY. Freeman, Chris and Luc Soete (1994) ‘New Technologies: Job Creation and Destruction’, International Labour Review, 1 (133), Geneva. Howells, Jeremy (1999), ‘Regional Systems of Innovation?’, in Daniele Archibugi, Jeremy Howells and Jonathan Michie (eds), Innovation Policy in a Global Economy, Cambridge: Cambridge University Press. Jones-Evans, Dylan (2000), ‘Entrepreneurial Universities: Policies, Strategies, and Practice’, in Pedro Conceicao, David V. Gibson, Manuel V. Heitor and Syed Shariq (eds), Science, Technology, and Innovation Policy: Opportunities and Challenges for the Knowledge Economy, London: Quorum Books. Kautonen, M., J. Kolehmainen and P. Koski (2002), Yritysten innovaatioympäristöt. Tutkimus yritysten innovaatiotoiminnasta ja alueellisesta innovaatiopolitiikasta Pirkanmaalla ja Keski-Suomessa. Teknologiakatsaus, 120/2002. Helsinki: Tekes. Kostiainen, Juha and Markku Sotarauta (2002), Finnish City Reinvented: Tampere’s Path from Industrial to Knowledge Economy, Cambridge, MA: MIT Industrial Performance Center Working Paper 02–002. Lash, Scott (1994), ‘Reflexivity and its Doubles: Structure, Aesthetics, Community’, in Ulrich Beck, Anthony Giddens and Scott Lash (eds), Reflexive Modernisation: Politics, Tradition and Aesthetics in the Modern Social Order, Cambridge: Polity Press, pp. 110–73. Lundvall, Bengt-Åke and Susana Borrás (1998), The Globalising Learning Economy: Implications for Innovation Policy. Report Based on the Preliminary Conclusions from Several Projects under the TSER Programme, Brussels: DG XII, Commission of the European Union. Miles, Ian and Nikos Kastrinos with Kieron Flanagan, Rob Bilderbeek and Pim Den Hertog with Willem Huntink and Mark Bouman (1995), Knowledge-intensive Business Services: Users, Carriers and Sources of Innovation, European Innovation Monitoring System (EIMS), Publication No. 15. Ministry of Labour (2001), Työpoliittinen Aikakauskirja 4/2001. O’Gorman, Colm and Mika Kautonen (2001), ‘Policies for New Prosperity: Promoting Agglomerations of Knowledge-intensive Industries’, Conference Proceedings of Technological Entrepreneurship in Emerging Regions, 28–30 June 2001, Singapore: National University of Singapore. Porter, Michael. E. and Örjan Sölvell (1998), ‘The Role of Geography in the Process of Innovation and the Sustainable Competitive Advantage of Firms’, in Alfred D. Chandler, Peter Hagström and Örjan Sölvell (eds), The Dynamic Firm: The Role of Technology, Strategy, Organization, and Regions, New York: Oxford University Press, pp. 440–57.
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Schienstock, Gerd (2001), ‘Social Exclusion in the Learning Economy’, in Bengt-Åke Lundvall and Daniele Archibugi (eds), The Globalizing Learning Economy, New York: Oxford University Press, pp. 163–76. Schienstock, Gerd (2002), Information Society, Work, and the Generation of New Forms of Social Exclusion: Final Report to the European Commission DG XII/TSER Programme, University of Tampere, Work Research Centre. Schienstock, Gerd and Pasi Tulkki (2001), From Foreign Domination to Global Strength: Transformation of the Finnish Telecommunications Industry, Unpublished report for the project ‘National Systems of Innovation and Networks in the IdeaInnovation Chain in Science-based Industries’ funded by the European Commission DG XII under the TSER Programme, Tampere: University of Tampere, Work Research Centre. Scott, Allen J. (1998), ‘The Geographic Foundations of Industrial Performance’, in Alfred D. Chandler, Peter Hagström and Örjan Sölvell (eds), The Dynamic Firm: The Role of Technology, Strategy, Organization, and Regions, New York: Oxford University Press, pp. 384–401. Seppälä, Raimo (1998), Hyökkäävä puolustaja: Maakunnan selviytymistaistelu ja Tampereen kauppakamari 1918–1998, Helsinki: Otava. Soete, L. (1996): ‘Social impacts of the Information Society – National and Community Level’, in Finnish Institute of Occupational Health (ed.), Proceedings of the International Symposium: Work in the Information Society, 20–22 May 1996, Helsinki. Touraine, A. (1991): ‘Face à L’exclusion’, Esprit (Paris), 169.
Other Sources Finnish Ministry of the Interior (2002), Osaamiskeskusohjelman kotisivut (in English: web pages of the Centre of Expertise Programme), 8 June 2001. National Technology Agency (Tekes) (2001), Selected Indicators of Regional Development in Finland, based on data by Statistics Finland and compiled by Tekes, an unpublished set of slides, Tekes, Helsinki. Statistics Finland (2000), Industrial Statistics for CityWeb Statistics Service, on 18 Oct 2000, City of Tampere StatisticsFinland(2001a),StatFin,http://statfin.stat.fi/StatWeb/start.asp?LA=fi&lp=home, on 29 Nov 2001. Statistics Finland (2002), StatFin, http://statfin.stat.fi/StatWeb/start.asp?LA=fi&lp=home, on 10 Feb 2003. Tampere Region Centre of Expertise Programme 1999–2006 (1998), Council of Tampere Region, Tampere. Valtioneuvoston kanslia (2000), Alueellinen kehitys ja aluepolitiikka Suomessa, Työryhmäraportti, Talousneuvosto, Valtioneuvoston kanslian julkaisusarja 2000/6, Helsinki.
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10. Universities and science-industry relationships: Making a virtue out of necessity? Mika Nieminen and Erkki Kaukonen 10.1
INTRODUCTION
The concepts of the knowledge society and the knowledge-based economy are currently dominating our understanding of socio-economic development. The significance of new innovations, as a factor creating competitiveness, sustainable economic growth and welfare, has emphasized also the significance of the knowledge production system. A central catchword for the new societal dynamics and accelerated knowledge production and utilization has been ‘networking’. Among other things, it has been assumed that knowledge is transferred effectively in networks and new ideas may flourish as different perspectives meet: networks not only support innovation systems but may induce innovations. (Edqvist 1997; Miettinen 2002; Schienstock and Hämäläinen 2001) In such networks traditional institutional boundaries among university research, governmental research institutes, and industrial research and development may also lose their earlier significance: constant reconfiguration of heterogeneous networks replaces strong institutional affiliations and transforms the whole basis of knowledge production. Knowledge is increasingly produced in the context of application and researchers become more like entrepreneurial actors in business networks. (Etzkowitz and Leydesdorff 1997; Gibbons et. al 1994; Nowotny et al. 2001; Slaughter and Leslie 1997) In studies of innovation attention has been primarily paid to knowledge transfer and utilization, and less to the mechanisms, conditions and actual developments in research and knowledge production. However, if scientific and technical research has such a central role in innovation systems, it would be important to know how knowledge production actually develops in the interaction among universities, government research institutes and industrial units carrying out research and development. This chapter focuses on this issue from the perspective of university research. We ask how researchers see the development of non-academic research col196
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laboration, and what kinds of advantages and problems such collaborative relationships may bring with them. By non-academic research we do not refer to the content of research activities but to research partners that are acting outside universities, like companies and ministries. Before moving on to the empirical analysis, we develop some heuristic starting points for studying science-industry relationships, and contextualize the analysis with a short analysis of Finnish science and technology policy. The development of collaborative relationships is affected also by science policy and research funding, which may or may not support and create incentives for research collaboration. We argue that during the last decade public policy in Finland strongly affected the development of science-industry relationships. Cutbacks and the moderate development of general university funding made universities receptive to external funding. As concurrently both external public and private research funding sources presupposed collaboration, the number of such interfaces increased significantly. What is especially interesting, however, is the fact that our interviewees claimed that collaborative research with industry does not necessarily contradict academic aspirations. Such relationships seem to often be a ‘win-win’ situation. The activity, which perhaps started as a necessity, became a virtue in the end.
10.2
SCIENCE-INDUSTRY LINKAGES: SOME THEORETICAL CONSIDERATIONS
Science-industry relationships comprise a complex issue and cannot be simply reduced to research contracts. The range of co-operative functions stretches from university-based institutes serving societal or industrial needs to seminars and the exchange of publications. One way to start to create coherence in these relations is to divide them into different categories according to their substance, like research, service/consulting, and education/training, or to distinguish between collaborative and knowledge transfer modes of interaction (Blume 1987, p. 12). More generally we could speak about direct, indirect and mediated linkages. Direct linkage mechanisms establish a direct connection between researchers or research organizations and users of knowledge, and are usually the most visible forms of linkage. These forms of linkage include university-industry joint research projects and research contracts. Indirect linkages include such activities as researcher training, background knowledge and professional networks, which affect society’s problem-solving capacity more generally. These kinds of indirect contributions may also be the most important economic benefit of publicly funded university research. Mediated linkages, in turn, pay
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attention to the role of public policy as a facilitating factor. Such linkages are structured through science councils, funding agencies, and technology centres attached to universities, or through advisory bodies attached to ministries. The mediated linkages facilitate and create possibilities for direct linkages by developing infrastructure and by establishing such funding instruments and criteria as to presuppose university-industry collaboration. Some recent surveys indicate that, for instance, EU funding has enhanced national and international inter-institutional collaboration. (Kaukonen 1990, 22–5; Mayntz and Schimank 1998, 752; Nissinen and Niskanen 1999; Niskanen et al. 1998; Pavitt 1998, 797; Salter and Martin 2001) While these kinds of general categorizations help to identify the huge range of possible interfaces, they do not pay attention to the fact that the nature and strength of the ties may vary a lot depending on various contextual factors. One example is the institutional basis. There may be differences in institutional strategies and orientations. Clark (1998), for instance, has developed the notion of an entrepreneurial university to describe a university’s strategic ability and willingness to widen its funding base and orient itself more towards the business enterprise sector and public services by developing co-operation links. Likewise, there may be different development strategies among university departments and units, which are expressions of their different perceptions of desirable development for that unit, affecting the way collaboration is developed. Some departments may guard their independence, while some others may actively pursue links with industry and political actors (Wilts 2000). The linkage mechanisms also have consequences for the degree of autonomy of the science system and on how research is conducted and oriented in university departments and research institutes. Rather evidently, strong dependence on external resources may give financiers an opportunity to steer research activities – even though it is necessary to note that normative expectations may vary by financier (Benner and Sandström 2000). It is a commonplace that the most intensive and multifaceted relationships to industry and government research institutes can be found in technical universities. In traditional multidisciplinary universities the relationships are usually less developed and intensive. From this it follows that industrial interests affect the development of research more in technical than in multi-faculty universities. Another fact is that each scientific field constitutes a specific cognitive and social environment (see Becher 1989), in which the researchers create relevant networks for communication and co-operation. In these networks, the relative importance of different orientations may vary greatly. The development of university-industry relations evidently depends also on industry’s research and development intensity, its research facilities and financial possibilities. Those branches, the development of which depends
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closely on scientific development, invest in research and development and are active in research collaboration by binding connections with relevant fields of science. In addition, it has been argued that the maturity of the technology may affect the intensity of relationships. In a developing stage of a certain technology the university-industry interactions would be more intense than when the technology is mature. There are, however, opposite views according to which the maturing of a technology does not necessarily reduce the importance of university research for industry (Blume 1987; Pavitt 1984). What may be even more important to notice is that the relationship between fundamental research and organizations’ capacity to use new knowledge is neither unidirectional nor straightforward. The translation of knowledge into innovative products is a rather complex process (see for example Cohen and Levinthal 1990; Faulkner and Senker 1995; Kline and Rosenberg 1986). Innovation requires knowledge input and a synthesis of knowledge from a wide range of internal and external sources. Alongside codified technological knowledge, knowledge about economics, organization and legal matters is also needed. In addition, tacit knowledge and skills acquired during work processes through informal interactions and personnel recruitment play a crucial role. Faulkner (1995, 287–8) even argues that informal exchanges of information are far more important from industry’s perspective than formal arrangements for co-operation. Also the success of formal collaboration can rely on the strength and friendliness of the informal contacts between the partners. The formal collaborations may bring little or no substantive benefit to the company if the personal relations are not strong and positive. On this basis it is rather clear that there is considerable variation in how institutional configurations and internal linkages in the research system may develop. The forms, strength, and utilization potential of such relationships are modified in a specific context of actors’ interests, available funding and supporting infrastructure. More generally, we may argue that the relationships develop in a multidimensional and complex matrix involving the institutional dimension, which consists of the various institutional actors and contexts with their distinct research profiles and norms (university-based, governmental and industrial research); the cognitive dimension, which covers the cognitive, substantive spectrum of scientific disciplines and research fields; and the spatial dimension, which involves research activities and co-operation at different spatial levels – local, national, macro-regional, global – each developing their specific agendas and organizational modes of research. These structures embody various sciencesociety relationships that are, in turn, dependent on developments in the larger society, its knowledge-intensive demands and capacity to support and use scientific and technological research (Kaukonen and Nieminen 1999).
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CONTEXT OF COLLABORATION: SCIENCE AND TECHNOLOGY POLICY AND RESEARCH FINANCE
Public policy may or may not support the development of university-industry linkages via mediated linkage mechanisms. In Finland governmental policy has evidently played a prominent role in strengthening such relationships. It was already the beginning of the 1990s when the Science and Technology Policy Council of Finland introduced the concept of a national innovation system into the vocabulary of science and technology policy. As an innovation system was understood broadly to include producers and utilizers of knowledge, various infrastructures and policies, it became a kind of metaconcept by which the functioning of the whole society could be examined within one overall framework. Hand in hand with the use of this new concept, a number of transitions took place in the Finnish science and technology system. Accountability pressures increased throughout the system, university research became predominantly financed by external, competitive sources, and researchers were urged to pay more attention to the utility aspects of knowledge. Finland also made extraordinarily large investments in research and development. While Finland was still recovering from the recession of the early 1990s, the government launched an additional funding programme for the years 1997–99. Consequently the share of gross domestic expenditure on research and development leapt rapidly from approximately 2.2 per cent at the beginning of the 1990s to over 3 per cent at the turn of the century (concurrently with the growing GDP).1 A focal policy target was the enhancement of the quality of research through scientific competition and collaboration. Political decision-makers favoured competitive funding mechanisms instead of discretionary funds in research funding, and thus research appropriations were increasingly allocated through public funding agencies. In 1990 the proportion of funding through agencies of total governmental research appropriations was still 25 per cent, while in 2000, 44 per cent of appropriations were granted through the funding agencies. The criteria for funding from funding agencies also increasingly presupposed research co-operation. This was visible especially in the increasing emphasis laid on science and technology programmes, which were used for targeting funding to specific research areas as well as for enhancing collaboration. During the 1990s, both focal funding agencies, the Academy of Finland (research councils) and the National Technology Agency (Tekes), significantly increased the share of funding allocated to programmes and the so-called intersector cluster programmes were also experimented with as a part of the government’s additional R&D funding programme.2 Counting all the sources
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of funding together, it is possible to estimate roughly that since 50 per cent of the National Technology Agency funding, 20 per cent of the Academy of Finland funding, and practically all EU funding were related to programmes, approximately 32 per cent of Finnish universities’ research funding was tied to programmes in 2000. Special attention was also paid to the position of universities in the system. The government presupposed that ‘co-operation of the universities will be increased with other parts of the research system, sector research and especially with the financiers and conductors of technical research’ (Development Plan for Education and University Research 1993). The government underlined that research in the universities should be directed to support the development of internationally competitive industries and more funding should be channelled to joint university-industry research projects. Thus, the policy guidelines explicitly aimed at reformulating the position of universities in the research system. Concurrently with the aforementioned changes, the spatial dimension, or international and regional aspects, grew in significance. As for the international dimension, in the 1990s the internationalization of science and technology was regarded as one of the most important goals of Finnish science and technology policy. Especially, the role of the European Union became more visible and influential in this respect, not to deny the more general effects of globalization and increasing economic competition (Hakala et al. 2002). There were also developments on the regional level that supported the integration of the science and technology system. The Finnish government launched a national programme aiming to network local and regional industry, research units, universities and colleges on the basis of regional innovation systems called Finnish Centres of Expertise. As the EU’s regional policy also provided extensive funding for development projects, especially in northern and eastern parts of Finland, the local aspect became more integrated into the international aspect through research collaboration among different EU regions (see Kaukonen and Nieminen 1999; Lemola, Chapter 14 in this volume). Due to cutbacks of general university funds during the worst years of recession (1993–94), and their modest increase after that, external funding of university research increased both in absolute and relative terms. While research expenditures covered by general university budget funding increased only by 22 per cent during the 1990s, there was a 152 per cent increase in external research funding in the same period. This was mainly due to two changes in the research funding. On the one hand, the national public research funding increased significantly because the government launched an additional research and development-funding programme. During a three-year period this programme increased research funding by 570 million euros. The funding was primarily channelled to governmental research funding agencies and only
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marginally to the governmental university budget. On the other hand, the EU funding increased significantly after 1995 when Finland became a member of the Union. As a result, the share of external funding of the total research expenditures at universities increased from 33 per cent in 1991 to 51 percent in 2000.3 Table 10.1 shows how the significance of different external funding sources changed during the 1990s. The focal position of the Academy of Finland (Finnish research councils) eroded to some extent from 1991 to 2000 as the National Technology Agency (Tekes) achieved more of a foothold in the universities’ research funding. Concurrently the share of EU funding started to rise. It should be noted that the most significant funding sources for university research were still public funding agencies, whereas companies and ministries had a relatively modest position in comparison. But then again, if the Academy of Finland is considered as the only traditional academic research financier, it is possible to think that ‘pure’ academic research lost its foothold – in relative terms – in the universities and this meant, perhaps necessarily, the increasing opening up of university research to society. Table 10.1 External funding of university research by source 1991–2000 (%, at 2000 prices) Year
1991 1995 1998 2000
External Academy National Ministries Firms EU Other funding of Finland Technology funding total Agency 1000 EUR 139 107 183 482 285 290 350 588
42 37 29 31
11 16 23 24
16 16 15 14
12 16 12 13
0 2 7 7
19 13 13 11
Other funding = municipal funding, other public funding, domestic foundations, international foundations, other international funding, university’s own assets Source:
Statistics Finland
An interesting finding is also that the share of company funding suddenly started to decline after 1995 even though the growth continued in absolute terms (from 26 million euros in 1995 to 36 million in 2000). Most obviously this is due to the significant amplification of Tekes funding both in relative and absolute terms (in 1995, 30 million and in 2000, 85 million euros). Since the growth of company funding was also bigger from 1991 to 1995 (some 12 million euros despite the recession) than in the latter period, it is possible to conclude that Tekes funding substituted to some extent for direct company
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funding. Tekes is, however, a national agency that has a strong role in supporting public-private sector research collaboration. Currently the role of Tekes in networking research and development can be seen as two-dimensional. Firstly, Tekes makes the collaboration possible by providing finance, and creating environments (technology programmes) for university-industry co-operation. Secondly, Tekes helps potential partners to find each other. Therefore, direct company funding and Tekes funding as a mediator can be seen as a whole when university-industry partnerships are considered. In summary, Finnish governmental policy strongly supported universityindustry relationships during the 1990s. This was not only visible in the policy guidelines but especially in the allocation of research funding. A specific instrument in this effort was research, technology and cluster programmes, which were expected to support both scientific and knowledge producer-user collaboration. The growing EU research funding and cutbacks of general university funds further supported this development. As an obvious consequence, university research had more contacts with non-academic actors at the end of the 1990s than it had at the beginning of the decade.
10.4
THE LANDSCAPE OF COLLABORATION IN THE EYES OF RESEARCHERS
While the funding statistics do not tell us about networking within universities and the content of collaboration, evidence from a recent survey (Hakala et al. 2003) confirms that Finnish university researchers have active project collaboration with various actors from domestic and foreign university departments to non-university research institutes and companies. There are, however, disciplinary differences in the collaboration profiles. Not very surprisingly, the humanities have less non-academic research co-operation and interaction than the other disciplines. The most ‘open’ disciplines are the technical and medical sciences – even though also the natural and social sciences have a lot of nonacademic collaboration. The results of the survey indicate the evident fact that disciplines have varying positions in relation to societal interests. These differences are also due to disciplines’ research substance, orientation and culture. As argued earlier, each discipline or research unit may comprise a specific research context within which relevant connections are developed. A further analysis of research funding among disciplines would point in the same direction: the humanities have the least external funding, while the proportion of total research expenditures increases when we move to examine the social sciences, and increases significantly in the case of medicine, engi-
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neering and natural sciences. Private research funding concentrates also around the last mentioned disciplines (Nieminen and Kaukonen 2001). How do university researchers then see non-academic co-operation; what kind of experiences do they have of it; and how is their research environment structured when research is done mostly with external funding? These are some of the themes in this section. Based on semi-structured interviews, the section provides a qualitative and interpretative approach to university-business enterprise sector relationships from the perspective of university researchers. The data consist of 17 interviews with leaders and senior researchers in Finnish university units and departments that have a lot of external funding and are active in non-academic research co-operation. In addition, three research liaison officers from two universities were interviewed. The interview scheme included questions on partners, forms of co-operation, knowledge transfer, and problems in co-operation. The interviews were conducted between October and December 2000 and the average interview length was two hours. The interviews were recorded. As faculty background, five interviewees were social scientists, five were from an engineering faculty, four were from a medical faculty, two from a natural scientific faculty, and one from a faculty of business administration (see Nieminen and Kaukonen 2001). 10.4.1
Research with External Funding
Currently, externally funded research is, more or less, a taken-for-granted situation among university researchers. It seems that as in the universities’ basic budgets there is almost no financing available for research activities, especially in empirical research, the funding has to be acquired from external ‘funding markets’. Cutbacks in universities’ general funding during the recession clearly decreased it to a level at which there is very little space for research activities. If tenured posts and infrastructure are excluded, research is financed practically by external funding from public and private sources. Practically speaking we could not do any research with those diminished basic resources anymore. After cutting resources, all the research has to be financed with external funding, either from public or private sources. (Head of department)
As the amount of departmental basic funding also depends on performance, most of these departments and research units can be seen as small or mediumsized knowledge-intensive ‘enterprises’ in which continuity depends on how well they attract research contracts and yield degrees. The interviewees, however, did not complain very much about the situation; it was seen merely as a fact that cannot be changed and with which they have to live. Some of the
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interviewees even suspected that some of the positive dynamics of the situation would be lost if research were to be financed mainly by general budget funding. It is noteworthy that the interviewees considered projects usually as rather academic, in the sense that projects are not strictly development work but the target is to generate more widely applicable knowledge and new ideas on the basis of which partners can start development work. The units and departments also try consciously to keep a distance from pure development. In technical research it is sometimes considered as rather difficult to carry out restricted development projects for firms since it would require detailed knowledge of the processes and technologies in the firms. These views may mirror the fact that the understanding of the potential and role of university-based research among users of knowledge is not as simplistic or stereotypical as is sometimes claimed. The development of this kind of relationship has, however, been a long process that has necessitated conscious development of research policy among departments and a new kind of attitude among firms. The relationship between academic basic and applied research can be blurred. It is a question of what is sensible and appropriate in different phases of research – the research questions can be both theoretical and practical in nature and the traditional distinction involves as such no intrinsic value. In one phase research projects can be closer to academic ends and in another phase closer to applications. It is evident, however, that public funding provides, after all, a freer framework for research when more fundamental questions are investigated. Direct project funding from companies can provide a sufficient funding source when research glides towards application-related questions. This can be interpreted so that public funding is needed after all as a counterweight to private contract research finance, and, therefore, as a source of funding for more fundamental and risky questions. There is a certain amount of that kind of work where public or academic funding is needed more – when new areas are investigated and related know-how developed as free from this kind of project framework, which is always stricter in terms of schedule and output. But then, in a way when we move between these areas or transfer knowledge to the other side, as we have created sufficient know-how potential, then the emphasis can be more on this applied side. (Professor)
Even though the interviewees did not consider that contract research would seriously contradict their academic orientation or substantively endanger their research, strong dependence on external funding sources creates some problems. The continuity of the research is all the time at stake. For researchers it is backbreaking to apply continuously for funding, as the length of contracts can be rather limited. Attempting to maintain a balance between academic activities (writing articles, academic meriting) and contract research activities may create problems as well. Therefore project work is very consuming for the personnel.
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Even though project activity may be experienced as satisfying, there is a danger that the workload becomes too big, endangering, at the same time, scientific reproduction. Projects come and go and as deadlines can be rather strict, researchers’ time is spent in a continuous ‘project treadmill’. The idea that these contracts would be somehow substantively in contradiction with academic research, I think it’s not true. So, at least broadly speaking, their contents are such that genuinely interest us. I think it works rather well, so that the research we are doing currently is rather meaningful. But these people have to make their living in project contracts which are in our unit often very short, like 3–5 months, so it means for a person who is interested in making an academic career, a rather difficult situation. You burn yourself out in project work and then you don’t manage or can’t do any more academic research. (Head of research unit)
This pressure is experienced especially in research units that finance all their functions externally. Viewed more widely, problems relate to maintaining personnel resources, taking a long view in increasing know-how, and to the continuity of research efforts. In the technical fields, especially, the recruiting of able graduate and doctoral students by collaborating companies may cause problems for maintaining a ‘critical mass’ in research. On the other hand, the recruitment of students or young PhDs also means knowledge transfer from the universities to industry. 10.4.2
Modes of Co-operation and Dissemination of Knowledge
As presented earlier, the potential modes of universities’ external research collaboration can be roughly divided into two categories: collaborative research mechanisms and knowledge transfer mechanisms (Blume 1987). In the group of interviewees, government-funded research programmes, contract research, and research consortia formed the most common modes of research cooperation. Also, knowledge transfer intertwined with research co-operation. One reason for this may be the fact that the more organized modes of knowledge transfer are organized as external to departments in specific organizations at the university level. Centres for further education take care of professional development, and science and technology parks serve the commercialization of knowledge. Furthermore, ‘hybrid-groups’ (Etzkowitz and Leydesdorff 1997; Gibbons et al 1994) do not seem to be operating either, which would blur the institutional boundaries between partners. Partners have a functional division of labour: certain parts of projects are carried out in different organizations. Dealings among partners are, however, rather intensive: ideas are shared and help given when needed.
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Besides project reports, seminars, complemented with consulting and personal visits, seem to be the major form of knowledge transfer in contract research. There may be different forms for seminars but a common denominator is intensive and thoroughgoing discussion on the project-related questions. For instance, as in the firms people are usually busy and it is difficult to find common time for discussions, the researchers may go to the firm in order to discuss the project and its results. In that way employees of the firm have an opportunity to clarify unclear matters and ask questions of researchers. The interviewees also considered this way of action as functional. We have done it so that we put researchers out there. They go to that company and gather that crew – not only the research manager or the members of a steering group, who visit here all the time – but their researchers and designers. And they go through these things there, this is the way to create conversation and questions. (Head of research unit)
Many interviewees were also convinced that the participation of a public financier or partner had created additional value in their research effort. Besides financing, public actors may provide researchers and knowledge users with a framework for networking. For instance, regional initiatives may network public or semi-public actors, university researchers, and companies. The role of public actors is very important here, so that without public actors this would have gone in a totally different direction. I don’t believe that something like this would have emerged without it, because after all our research focus is on the areas that are not directly utilizable economically. As a matter of fact, public actors have made these private actors work together in this area quite well. If we think of our research projects, they are really good for the companies as they sit on the steering groups and suddenly they realize that they can do business together in this area and these contacts wouldn’t exist without a public actor. (Head of research unit)
10.4.3
Network as a Resource
In order to be successful in ‘research markets’ researchers need a wide variety of contacts – a network in which research information and co-operation possibilities are passed along. The existence of a network means also that the department or research unit’s partners pass along their experiences of research co-operation in their acquaintance network. Ultimately this means that researchers who are dependent on external research financing have also become dependent on networks in which the reputation of a research unit may be in a decisive position when decisions on financing and co-operation are made. As co-operation means interaction among people, personal relationships become the most valuable social capital for researchers, as they are developing their individual or unit research programmes.
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It is evident, however, that usually the development of reliable business relations does not come at once. It may require years of co-operation or acquaintanceship. Sometimes it has been entangled also with a department’s history and the activities of previous professors and researchers. Likewise the whole orientation of a department may be dependent on leading professors and on their attitude towards external research co-operation. Mutual trust among partners is one of the focal conditions, if not the primary one, for functional and interactive co-operation. For instance, participating companies may observe a researcher – what s/he does and how s/he does things – before they start to trust him/her. It seems also that in any case mistrust cannot be abolished among participating companies that are competing with each other. A researcher, however, may be able to create a trusting relationship with each of the participants if companies believe that the researcher is not ‘leaking’ their business secrets to other companies. In the beginning, every time a new project starts, hardly anyone trusts each other and co-operation is very superficial. Companies are waiting without doing anything and waiting for the researcher to produce knowledge. But when you get a certain trust, it goes the other way round, so that the researcher waits there and gets know-how and help. To my mind it is based on trust. (Senior researcher)
Networks and partners may have a significant role also in project design. Many times projects are developed in co-operation with partners. The original idea may come from a research group, but after that it is discussed among potential partners. It could be said that researchers stimulate some parts of their network at this stage as they start to cultivate the idea. One or more researchers (or the head of the unit) contacts potential financiers (public and/or private) and other potential research partners in order to find out who would be interested in participating in the project. As soon as interested partners are found, the process goes further with discussions about the subject of the project. The target is specified and several interests are tied together as the original idea is adapted to fit into the interests of partners. After that a specified plan with a budget is made and the project may start as necessary funding decisions are made. Even though the details of the process may vary it is usually rather interactive. Sometimes a research group may have a relatively strong position in project negotiations as contractors do not have any clear idea of how the project would be conducted. Researchers may define research problems and design a research plan that is then discussed with contractors. In a still slightly different model, a research group’s co-operation with a contractor may be so fixed that projects are constantly modified and developed in the framework of that relation. In this model the role of financier becomes close to that of a research partner. The
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research group and representatives of a financier actually ‘sit on the same side of the table’. It is not just a joke that the project idea of these partners, who come to suggest project co-operation, is very unspecified. … Here and now I can’t remember any research that we would have been given a framework for and instructions that this kind of research is needed, but we have mostly ourselves shaped it – both methods and research questions. (Head of research unit)
It has to be noted, however, that the spectrum of modes of research finance and co-operation is extensive. Traditional contract research, in which the target of research is usually narrowly defined and problems are given beforehand, still has a role in collaborative research. Likewise, at the other end of the continuum ‘constrained research – free research’, traditional research proposals to research councils and foundations for curiosity-oriented research have a significant role as a source of finance. In this context interactive project design has a foothold as a kind of middle model that arbitrates between different interests. As was already mentioned, departments and research units dislike traditional contract research and prefer contracts that guarantee them more elbowroom. However, even though direct applications are not necessarily expected, research is often ‘applied basic research’ by nature. 10.4.4
Benefits of Co-operation
The benefits of external co-operation for university research can be divided, roughly, into two groups: first, financial and facility-related benefits and, second, knowledge-related benefits. The financial benefits of contract research are significant. Besides the fact that external funding is vital for the whole research enterprise, project overheads make it also possible to support the – usually rather weak – basic resources in the departments and to organize academic activities for which there would not be resources otherwise. Sometimes researchers have also managed to create such long-lasting and trusting relationships with their partners that those companies allow them to use their testing and laboratory facilities when needed. From the perspective of the research group, this practice creates financial benefits because they do not have to build the same kinds of facilities in the university, and the company may benefit as it may utilize the results later in its development work. Companies may also provide researchers with different kinds of technical devices or chemical compounds which are needed in the research process. For instance, a professor told how a company produces certain kinds of electrical devices for them. Now these devices are free for them, but without this collaboration they would have to pay for them.
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If we think that we have firm X’s laboratory and testing facilities in use. So, if I now call there and tell them that my researchers will come there to study this phenomenon in their testing laboratory … then, at once they have the first free time there, the researchers get there and it does not cost anything. So, we don’t have to build that kind of testing facility here and invest millions in that. … And then there is nothing like ‘if you come here, we want something’. But as we write reports, knowledge comes out and they are closer to utilizing it than some competitors out there. (Professor)
The flow of knowledge is not a one-way street from university research to companies or other utilizers but co-operation creates an evident knowledge impact on the university research as well. External collaboration provides access to knowledge that would otherwise be difficult or impossible to reach and diversifies the knowledge production framework outwards from the disciplinary context. On the basis of interviews, it is possible to sketch six different knowledge effects. 1. Co-operation provides up-to-date knowledge on the business enterprise sector’s technical development. At least in some cases achieving this kind of knowledge would be difficult without collaboration. The access to this kind of knowledge may also provide for wider understanding of some technical or physical phenomena. 2. Scale benefits: collaboration with large companies and other organizations with substantial research and development facilities provides university researchers with a wide knowledge-production framework. Relatively small research groups in universities may utilize a wider network of expertise and benefit from that. 3. Access to partners’ tacit knowledge and a possibility to anticipate future developments on the basis of this knowledge. This knowledge may be technical, organizational or procedural, which may be non-salient for an outsider. 4. Partners may pass along information on new contacts and potential partners that benefits the research effort. This mode of action can be called also a ‘network extension’ as the actors are widening the reach of their network in this way. 5. Partners may provide access to data or databases that would possibly be expensive or even practically impossible to attain otherwise. One example in the sample was a database being so large and difficult to collect that it would have been impossible without the contractor’s finance and collaboration. 6. In general, a chance to study interesting and important phenomena. For instance, many natural and physical phenomena occur in different contexts and applications. Collaboration with companies offers an opportunity to study these phenomena. The benefit is both financial and knowledge-related.
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Co-operation thus creates, at its best, a wide knowledge-production framework and an extended network, in which several researchers and nonacademic actors may contribute to research. 10.4.5
Problems in Collaboration
In general, there does not seem to exist any major problems in research cooperation. The interviewees did not experience, for instance, that financiers would try to steer their work too much by using their financial power. The processes are, as described earlier, rather interactive. The secrecy of research results has not been a problem either. It is ‘only a matter of negotiation’. Sometimes companies want to defer the publishing of results, but the maximum time in this group was six months. Quite the contrary, a typical problem was that there is not enough time to publish results. It is just a couple of times now it has been said that nothing is allowed to be published. It is more a matter of negotiation, that we can disconnect these issues in many ways from those (industrial) connections and are able to publish parts of it … We have had more as a problem that we have more results which we could publish if we had time. (Professor)
Communication and culture-related problems in collaboration might occur when partners’ backgrounds are far away from each other. These problems reflect deep cultural and orientation-related differences among persons who have different educational backgrounds, professional experiences, action models, preferences, and values. It seems that the problems are not, however, overwhelming; partners can learn from each other. Communication problems may also relate to differing working habits and conditions. There may be differences even within one and the same company. A professor explained that they do not have any problems in communicating with a company’s research and development department but problems may emerge as soon as the partner is from the business unit of the same company. Expectations and working conditions may differ within the same company so much that it reflects back to research co-operation. Sometimes even the way to put things may cause tensions between the project group and the contractor. Problems do not necessarily relate to differing working habits either, but to persons. In general, it seems that these kinds of problems are commonplace in every collaborative relationship and they are not experienced as serious. One might say, ‘minor problems are business as usual’. One explanation is, as some interviewees brought out, that the nature of collaboration changed during the 1990s. Partners or contractors have begun to understand the nature of research and its requirements nowadays better than they used to and therefore the possibility
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of conflicts of interest has also become smaller. Another reason is that cooperation is not carried out with partners that are known to be hard to work with. Many years’ experience of different partners filters functioning relations from non-functional ones. An additional explanation for the absence of problems is therefore the fact that almost all the interviewed persons represented units that have relatively long experience with collaboration and therefore they are able to see and solve potential problems before they grow into significant ones. Intellectual property rights form, however, an exception. They are usually experienced as problematic for one reason or another. Even though the most experienced departments and research units do not have any major problems, patenting and intellectual property rights seem to be such a new issue that some researchers feel the current situation to be unclear. Even though a researcher might be experienced in external co-operation, it does not necessarily entail that he would be experienced in protecting his property rights. The commercialization of research results may provoke uncertainty. This is a new thing for me and a kind of academic paranoia strikes. Especially the thought that we have an idea for equipment, how we could make it work as soon as we conduct these experiments and research. So, if a big international company realizes that, aha, there is an interesting concept here … it can easily slip over to them, in a way passing us by. (Professor)
Most likely intellectual property rights may be the biggest single area where contradictions between researchers and contractors may emerge, since innovation means potential economic value. The experienced departments and units, however, seem to be rather well aware of potential pitfalls. Yet it is obvious that in disputes over property rights companies may successfully use their financial power. Especially, if a company is a big and important financier for research, researchers may back off in order to maintain financing. An interviewee told how an argument over patent rights recently emerged between a research team and a company. The argument developed to the point that the rector of the university and the director of administration had to participate in negotiations. Finally, the company made an announcement that if the researchers wanted to hold to their claims, the company would end its co-operation with the university and withdraw its funding. The conclusion was that the researchers dropped the case in order to maintain the status quo.
10.5
CONCLUSIONS
As in many other countries, several major changes took place in Finnish science and technology policy and research funding during the last decade (see OECD 1998; 2000). The Finnish science and technology system became institution-
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ally more diverse and politically more integrated. New institutionalized forms of scientific and technical research (like specific national and regional programmes, and science and technology parks) and the development of the EU’s research, technology and development policies added new dimensions to the system and made it more complex. At the same time, science and technology came closer to each other and co-operation in policy-making and research funding among various funding bodies and ministries increased. The increasing complexity of systemic linkages and a need for efficient and effective use of resources necessitated better co-ordination. It is also interesting that there was a wide consensus on the central questions of science and technology policy. One reason for this may have been that surviving the recession at the beginning of the decade and after that the development of the information society became ‘national projects’, which obviously created consensus and balanced contradictions over critical issues. Under these circumstances it became a self-evident fact that investment in knowledge and know-how as well as in high technology is the essential prerequisite for the success of a small country with relatively limited resources. On the other hand, as there are a limited number of focal actors, they know each other well and have numerous formal and informal occasions in which to negotiate over critical topics. Perhaps an additional, and more prosaic, reason has been that the implemented policy has also given something to everybody: even though there has been a very strong emphasis on technological research, especially ICT and biotechnology, the other fields of science have benefitted from the policy as well. While new emphasis was put on the efficiency and effectiveness of knowledge production, co-operation among universities, research institutes and industry also became important. Especially, research and technology programmes were designed to support intra- and inter-institutional research cooperation. In general, it seems that Finnish science and technology policy was quite successful in supporting university-society relationships. University research had more contacts with non-academic actors at the turn of the century than it had at the beginning of the 1990s. Universities are, however, internally highly diversified. The technical, natural and medical sciences are currently closest to the structures of the innovation system, while the humanities and the social sciences are located further away from the core of the innovation system (Hakala et al. 2003; Nieminen and Kaukonen 2001). As external funding was favoured in public research funding and the growth of general university funding was moderate, externally funded research became a taken-for-granted situation among researchers during the last decade. External funding enabled the development of university research and ‘patched’ resource gaps in the aftermath of the recession. Unlike what one might expect, contract research does not seem to seriously contradict academic aspirations. There are
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also a number of knowledge-related benefits that result from co-operation: access to protected knowledge sources and tacit knowledge, and the extension of knowledge-production frameworks, among others. Partners have been able to develop functioning relationships and a division of labour. This might be so partly because public funding agencies have remained the most significant funding sources. Another reason might be that as there are relatively few researcher-experts, on the one hand, and relatively few companies that finance research, on the other, these relationships have to be nurtured for mutual benefit. At least bigger firms have also recognized the long-term necessity of investing in basic research. The public policy, in turn, has created successfully functioning frameworks for this kind of collaboration. Additionally, we may also speculate that pressures for plain development work in the universities have eased up since this kind of work has been done extensively in governmental research institutes and especially in the Technological Research Centre (VTT). Unlike in some other countries, government research institutes have a specific role in this respect and it has been possible to develop a division of labour between research institutes and universities – not to deny that many research institutes conduct basic research as well. Dependency on external funding may, however, create problems and tensions in the research organization. Short-term contracts and continuous applying for funding create an environment where the continuous rush and back-breaking workloads dominate working conditions. Combining academic goals with the determinants of project work is not an easy task either. From a general point of view, these results seem to be rather parallel to some other empirical studies that have dealt with university-industry collaboration. Co-operation does not necessarily lead to ‘unintended consequences’ and the demise of academic freedom but provides access to complementary expertise and increases fruitful knowledge exchange. On the other hand, the short-term orientation of research may become a major problem for researchers. (Behrens and Gray 2001; Howells et al. 1999; Meyer-Kramer and Schmoch 1998). Researchers who are dependent on external research financing have also become dependent on networks. In order to be successful in ‘research markets’ researchers need a wide variety of contacts – a network in which research information and co-operation possibilities are passed along. As co-operation means interaction among people, personal relationships have become the most valuable social capital for researchers, as they are developing their individual or unit research programmes. The landscape of non-academic research co-operation seems, however, rather conventional. Co-operation takes place mostly in the framework of contract research and public research programmes. These modes of operation create a kind of core around which the focal modes of knowledge transfer are also clustered. Active communication among partners – either in the form of visits, meetings, reporting or seminars – lays the basis for knowledge
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transfer. Research collaboration is the most important form of interaction and it also necessitates informal contacts. According to the interviews conducted for this study, it can be suggested that there has developed between traditional contract research and academic research an intermediating ‘interactive research mode’ that can be characterized by qualities such as multilateral external contracts, multiple internal and external partners, equal partnership and interactive project design. This mode differs in several dimensions from the traditional contract research and academic basic research. This mode is neither exactly similar to Mode 2, propagated by Gibbons et al. (1994), since there still seems to be a distinctive academic focus in the research. Knowledge flows in several directions in these relationships and therefore the idea of knowledge transfer, implying a unidirectional, linear relationship, could be replaced by the term ‘exchange of scientific knowledge’, as Meyer-Kramer and Schmoch have suggested (1998, 842). These findings raise, however, some questions. There is more research funding in the Finnish science and technology system than ever. Also, the universities’ research funding has reached the highest level ever. Instead the structural allocation of funding seems to cause problems. As all the research funding is practically speaking external funding, there is not enough basic funding (general university funding) to maintain and guarantee continuity, as the interviews indicate. While it is obvious that external funding motivates networking, it is also obvious that more basic resources would be needed to maintain infrastructure, guarantee possibilities for continuous development and promote the accumulation of the knowledge base in research units. The functioning knowledge base is important from the perspective of both indirect and direct contributions to socio-economic development. Another related problem, concerns the way in which we understand the structures of an innovation system. Usually the concept of an innovation system is understood, implicitly or explicitly, as those structures that support the economic utilization of knowledge. Perhaps following from this, the functions of the universities are seen merely from the point of view of economics and they are treated as if they were not multifunctional or internally highly diversified institutions. Similarly, in recent Finnish policy discussions relatively little attention has been paid to the issue of academic core functions and competencies. As we have already argued, the functioning of this knowledge base seems to be very important for the functioning of the whole innovation system (see Pavitt 2000). Evidently more attention should be paid to these structures. If more attention is paid to the academic core, the diversity of the research system should also be recognized. It seems that there would be a need for a diversified and multiperspective policy, which, at the same time, would take into account the disciplinary-specific problems and the internal connections within the system.
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More generally these problems relate to the question of how to maintain effectiveness and networking in tandem with supporting academic core functions. Obviously there are no easy or clear-cut answers to this question. On a general level it can be claimed that universities should strengthen the layer of research and service units which serve societal needs – throughout the whole disciplinary matrix – and at the same time protect the academic core functions. As Burton Clark (1998) has suggested, this outer layer would possibly protect and benefit academic core functions if it were organized properly. It might act as a buffer against excessive societal demands while its project activity might benefit the academic core in the form of knowledge impacts and surplus finance. In order to function properly this interface, however, would need universitylevel deliberate policy actions and consensus on its functions. It is important to note, however, that the definition of academic core functions itself is a relative and historically changing issue. In addition to traditional basic sciences, new scientific and technological fields, often involving multidisciplinary combinations, are continuously emerging and may become strategically important. At the same time new scientific and related professional competencies emerge and evolve. This close connection between scientific research and new professional skills and competencies underlines the importance of investing in universities and basic research as well.
NOTES 1. Much of the total increase was, however, due to increasing private research and development investments, which, in turn, were due to Nokia’s research and development. It has been estimated that in 1999 Nokia accounted for approximately a third of private expenditure on research and development in Finland – over 20 per cent of all Finnish research and development activity (Ali-Yrkkö et al. 2000). 2. The aim of the cluster programmes was to form wide research areas in order to accommodate the specific targets of science, technology and innovation policy with those of other sector policies. From 1997 onward, altogether eight cluster programmes were launched under five ministries and they included over 400 participating organizations (Prihti et al. 2000). 3. The statistical data used here are derived from official research funding statistics compiled by Statistics Finland. In the formulation of the statistics, Statistics Finland has used recommendations given by the OECD and from 1995 onwards also recommendations given by the EU. All the presented figures are research expenditures; education-related expenditures are excluded. In general, the comparability of longitudinal data is satisfactory. However, there have been some changes in the statistics during the 1990s and in these cases the statistics were modified to maintain comparability over time. The data have been indexed to 2000.
REFERENCES Ali-Yrkkö, Jyrki and Raine Hermans (2002), Nokia Suomen innovaatiojärjestelmässä (Nokia in the Finnish innovation system), Keskusteluaihe No. 799, Elinkeinoelämän tutkimuslaitos, Helsinki.
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Becher, Tony (1989), Academic Tribes and Territories, Intellectual Enquiry and the Cultures of Disciplines, Milton Keynes: SRHE and Open University Press. Behrens, T.R. and D.O. Gray (2001) ‘Unintended Consequences of Cooperative Research: Impact of Industry Sponsorship on Climate for Academic Freedom and Other Graduate Student Outcome’, Research Policy, 30, 179–99. Benner, M. and U. Sandström (2000), ‘Institutionalizing the Triple Helix: Research Funding and Norms in the Academic System’, Research Policy, 29, 291–301. Blume, Stuart (1987), ‘The Theoretical Significance of Co-operative Research’, in Stuart Blume, Joske Bunders, Loet Leydesdorff and Richard Whitley (eds), The Social Direction of the Public Sciences: Causes and Consequenses of Co-operation between Scientists and Non-scientific Groups, Dordrecht: D. Reidel Publishing Company. Clark, Burton R. (1998), Creating Entrepreneurial Universities: Organizational Pathways of Transformation, Oxford: IAU Press and Pergamon. Cohen, W.M. and D.A. Levinthal (1990), ‘Absorptive Capacity: A New Perspective on Learning and Innovation’, Administrative Science Quarterly, 35 (1), 128–53. Development Plan for Education and University Based Research 1991–1996, State Council Decision 18 June 1993 (Koulutuksen ja korkeakouluissa harjoitettavan tutkimuksen kehittämissuunnitelma vuosille 1991–1996, Valtioneuvoston päätös 18.6.1993). Edqvist, Charles (ed.) (1997), Systems Of Innovation: Technologies, Organizations and Institutions, London and Washington: Pinter Publishers. Etzkowitz, Henry and Loet Leydesdorff (1997), Universities and the Global Knowledge Economy: A Triple-Helix of University-Industry-Government relations, London: Pinter Publishers. Faulkner, W. (1995), ‘Getting Behind Industry-Public Sector Research Linkage: A Novel Research Design’, Science and Public Policy, 22 (5), 282–94. Faulkner, W. and J. Senker (1995), ‘Policy and Management Issues in Company Linkage with Academic and Government Laboratories: A Gross-technology Study’, Journal of High Technology Management Research, 6 (1), 95–112. Gibbons, Michael, Camilla Limoges, Helga Nowotny, Simon Schwartzman, Peter Scott and M. Trow (1994), The New Production of Knowledge: The Dynamics of Science and Research in Contemporary Societies, London: Sage. Hakala, Johanna, Erkki Kaukonen, Mika Nieminen and Oili-Helena Ylijoki (2003), Yliopisto – Tieteen kehdosta projektimyllyksi? Yliopistollisen tutkimuksen muutos 1990-luvulla (University – From the Birthplace of Science to a Project-mill? Change of University Research in the 1990s), Helsinki: Gaudeamus. Hakala J., P. Niskanen and E. Kaukonen (2002), ‘Becoming International, Becoming European – EU Research Collaboration at Finnish Universities’, The European Journal of Social Sciences, 15, 357–79. Howells, Jeremy, Maria Nedeva and Luke Georghiou (1998), Industry-Academic Links in the UK, Report 98/70, University of Manchester, PREST. Kaukonen, Erkki (1990) Theory, Dynamics and Policy of Science – Science Studies from a Small Country Perspective, Acta Universitatis Tamperensis, Series A, Vol. 300. Kaukonen, E. and M. Nieminen (1999), ‘Modeling the Triple Helix from a Small Country Perspective’, Journal of Technology Transfer, 24 (2), 173–83. Kline, Stephen J. and Nathan Rosenberg (1986), ‘An Overview of Innovation’, in Ralph Landau and Nathan Rosenberg (eds), The Positive Sum Strategy: Harnessing Technology for Economic Growth, Washington, DC: National Academy Press.
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Mayntz, R.. and U. Schimank (1998), ‘Linking Theory and Practice: Introduction’, Research Policy, 27, 747–55. Meyer-Kramer, F. and U. Schmoch (1998), ‘Science-based Technologies: UniversityIndustry Interactions in Four Fields’, Research Policy, 27, 835–51. Miettinen, Reijo (2002) National Innovation System: Scientific Concept or Political Rhetoric, Helsinki: Edita. Nieminen, Mika and Erkki Kaukonen (2001), Universities and R&D Networking in a Knowledge-Based Economy: A Glance at Finnish Developments, Sitra Reports Series 11, Helsinki: Sitra. Niskanen, Pirjo, Riikka Eela, Sasu Hälikkä and Terttu Luukkonen (1998), Suomalaiset EU:n neljännessä puiteohjelmassa (Finns in the EU’s Fourth Framework Programme), Kansainvälisten verkostojen raportti 3/1998, Helsinki: Tekes. Nissinen, Marja and Pirjo Niskanen (1999), COST – Scientific Cooperation on Researchers’ Terms: A Study on Finnish Participation, VTT Publications 388, Espoo, Technical Research Centre of Finland. Nowotny, Helga, Peter Scott and Michael Gibbons (2001), Re-Thinking Science: Knowledge and the Public in an Age of Uncertainty, Cambridge: Polity Press. OECD (1998), University Research in Transition, Paris: OECD. OECD (2000), Science, Technology and Industry Outlook, Paris: OECD. Pavitt, Keith (1984), ‘Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory’, Research Policy, 13, 343–73. Pavitt, Keith (1998), ‘The Social Shaping of the National Science Base’, Research Policy, 27, 793–805. Pavitt, Keith (2000), Public Policies to Support Basic Research: ‘What Can the Rest of the World Learn from US Theory and Practice? (And What They Should not Learn), Electronic Working Papers Series, Paper No. 53, University of Sussex, SPRU. Available www.sussex.ac.uk/spru Prihti, Aatto, Luke Georghiou, Jyrki Juusela, Frieder Meyer-Krahmer, Bertil Roslin, Tuire Santamäki-Vuori and Mirja Gröhn (2000), Assessment of the Additional Appropriation for Research, Sitra Reports Series 2, Helsinki: Sitra. Salter, J.A. and B. Martin (2001), ‘The Economic Benefits of Publicly Funded Basic Research: A Critical Review’, Research Policy, 30 (3) 509–32. Schienstock, Gerd and Timo Hämäläinen (2001), Transformation of the Finnish Innovation System: A Network Approach, Sitra Reports Series 7, Helsinki: Sitra. Slaughter, Sheila and Larry L. Leslie (1997), Academic Capitalism: Politics, Policies, and the Entrepreneurial University, London: The John Hopkins University Press. Statistics Finland, various years, Helsinki: Statistics Finland. Wilts, A. (2000), ‘Forms of Research Organization and Their Responsiveness to External Goal Setting’, Research Policy, 29, 767–81.
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11. Polytechnic reform: A response to the learning economy Kari Kekkonen 11.1
INTRODUCTION
The economic historian Cameron (1995, p. 246) remarks that a less noticed feature of the progress of the 19th century, but not less remarkable than urbanization or the growth of the industrial workers or the increase of incomes, was the expansion of literacy and education. Now at the beginning of the 21st century, the discussion of the information society seems sometimes to suffer from the same characteristic. In the debate about knowledge creation, learning and education, basic and vocational education have been forgotten, they are some kind of blurred area. This chapter concerns the role of the education system as a part of the learning society.1 The main focus of this chapter is on the Finnish polytechnic reform; all parts of the education system are commented on in relation to it. The established polytechnic system is based on the former higher vocational colleges and it is defined as practically part of the dual higher education system, universities being the other part of the system. The second section of the chapter introduces the concept of the learning economy and a typology of the different kinds of approaches to vocational education. The third section illustrates the reform of the vocational educational system and analyses the policy goals of the 1990s reform. The state of the postreformed polytechnic system is described in the fourth section based on our empirical findings. The fifth section considers the current problems of the education system and the challenges in its development.
11.2
EDUCATION IN THE LEARNING ECONOMY
OECD reports (2000b, 2001) define the knowledge economy as an economy that is directly based on the production, distribution and use of knowledge. 219
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Increasing demand for higher education certificates is usually argued for by changing employment trends between industries (from basic industries to hitech industries and services), employment trends within industries (upskilling process) and upgrading trends within occupations (professionalization). The knowledge economy is often characterized as a learning economy (Lundvall 1999). In this context learning can be defined as a process of the acquisition of competence and skills that allows both the learning individual and the organization s/he is a member of to be more successful in reaching individual goals and those of the organization (OECD 2000b, p. 29). However, educational credentials are only a proxy for competences and skills. These are increasingly acquired directly in the work process through learning by doing and learning by using. The speed of knowledge production and knowledge mediation in the private sector must be balanced by a new division of labour and collaboration between formal and informal institutions of learning. This means that all education and training depends increasingly on the co-operation of many partners. The study of the reform in higher education (Eurydice 2000) reports that all European countries have seen a massive increase in the size of the higher education sector since World War Two. The report Education at a Glance 2000 (OECD 2000c) looks at the progress of tertiary education in the period of the 1990s. The comparative survey indicates that the number of students enrolled in tertiary programmes grew more than 20 per cent between 1990 and 1997 in all but five OECD countries, and in eight countries more than 50 per cent. Today, an average of four out of ten young people are likely, during their lives, to enter tertiary programmes which lead at least to a Bachelor’s degree. In some countries, this proportion is as high as one person in two. Other indicators also show that the role of education is becoming more crucial all the time; public expenditure on education has grown faster than GDP, the more is spent per student the better education brings significant rewards in terms of employment and pay prospects. The Eurydice study (2000) states that the increased demand for places in higher education during the 1960s and 1970s was to a great extent also a consequence of raised social expectations after the war as a greater proportion of the age group achieved the qualifications needed for entry to university. Since 1980, changes in the European labour market, particularly the move away from heavy industry towards more service-based employment, have reinforced the demand for higher-level training. Despite the decrease in the number of school-leavers, the demand for higher education has continued to increase in most countries as young people and adults choose to obtain further qualifications before entering a very competitive job market. The above-mentioned labour market changes have also created an increasing demand for more vocationally oriented higher education for both young people
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and adults. And it has stimulated closer links between business and higher education institutions. In most countries this was reflected in the restructuring of the higher education system during the 1980s when specialist training colleges were upgraded to the higher education level and by expanding the nonuniversity sector to provide more technically based higher education. To analyse Vocational Education and Training (VET) systems we have developed a typology that gives an overview of possible approaches to learning and knowledge in the framework of formal training. The typology shows that views concerning vocational training can differ significantly with respect to the institutional structure, the essential concepts and whole orientation toward the education function, as Table 11.1 shows. The first type can be called the model of centralized education. Its aim is the conservation of the existing structures and functions of education. Within the centralized model, the setting of skill standards is the duty of the state and the education and labour administrations. The idea behind the model of centralized education as a response to the demands of the learning economy echoes the slogan of neoclassical economics: ‘business as usual’ in the form of ‘education as usual’. We can contrast the former model with the model of mechanical learning markets. Within this model the integration of academic and vocational education means to constrain module formation in education and the external power of decision-making in the curriculum. The setting of skill standards is the exclusive prerogative of employers and their organizations and the only supportable form of work-based learning is the apprenticeship system. The idea behind this model is characterized by the slogan ‘work as usual’; despite upheavals, work will always revert to its traditional forms, so in the case of education the simple learning-by-doing formula is sufficient. The third type can be characterized as the model of learning networks, perceiving the convergence of education and industry as a dynamic and perpetually changing network process. The integration of academic and vocational education is a process of building up network linkages between the communities of teaching in different educational institutions (interrelations) and within an educational institution (intrarelations). The setting of skill standards takes place in networks that link the communities of teaching in schools and the communities of working in enterprises. Offering students effective work-based learning presupposes well-functioning networks of industries, education and other supporting actors. The increased importance of the flows of knowledge as well as the demand for flexible training services implies the ineffectiveness of the centralized system, which separates education from work. This also concerns the theoretical analyses: viewing education and industries as autonomous social fields or separate structures does not provide tools to analyse the prevailing situation
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Table 11.1 Concepts of learning and knowledge in the framework of formal education Types of orientations of vocational education Aspect
‘Education as usual’ CENTRALIZED LEARNING
‘Learning economy’ NETWORKED LEARNING
‘Work as usual’ MECHANICAL LEARNING MARKETS
Institutional structure
Separated and isolated VET institutions Strict, separated, science-based Different sciencebased theoretical skills and divergent action-oriented know-how Subject-based and teaching-oriented model, student is a passive object, academic and practical skills are separated Importance of formal certification
Multidisciplinary communities of learning Flexible, integrated and work-based Integrated theoretical and action-oriented skills
Industry-dominated VET system
Curriculum Know-how
Learning
Knowledge
Integration of academic and vocational education Education and life course
Definition of know-how standards
Practical training and academic skills are integrated Student is an actor and institution is construction of learning environment On-the-job learning Development of competence is essential Emphasizing explicit Integration and reciprocity of tacit type of knowledge and explicit knowledge Flexible, caseFormal, centralized directed co-operation specific integration Formal training and work are separate periods Emphasizing retraining and further training activities Centralized (national or municipal)
Personal development and career integrated into formal training Integration of education and work Shaping in the interaction of educational institutions and enterprises
Work-based skills Action-oriented skills
Emphasizing on-thejob learning (trad. apprenticeship) Contemporary work skills are basis of training Learning is directly connected to production of narrow qualifications Simple concept of tacit knowledge Externally specified formulation Retraining through new technology or work methods
Dictated by business life
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Polytechnic reform On-the-job learning
Student is in charge of the practical training
Orientation of Sectoral policies and the educational administration policy Source:
Shared responsibility between educational institution and enterprise Educational policy as an integrated part of regional industry policy
223 Apprenticeship is emphasized; all needed learning on the job Education policy is subordinated to industry policy
Raivola et al. (2001)
and the course of development. With a view to innovations and flows of knowledge, examining the relations of education and industries as a network of co-operation and interaction is more fruitful. Contemporary policy, in most of the European countries, emphasizes the strategic role of the individual providers. They are expected to strengthen their contribution to regional activities, their activities of transition from school to work, and widen their training supply. Technological and social developments require, however, that the role of the VET organizations should be changed; the traditional target for initial, regular course delivery should be combined with new targets and strategies for adult training and innovation-facilitating activities. VET providers should define their own specific roles within innovation networks and they should look for strategic alliances with other knowledge-providing institutions in their regional context (Nieuwenhuis 1998). According to Rosenfeld (1998), VET organizations should develop the following four activities to support technology diffusion and innovation: 1. provide education that functions as a gateway to the workplace 2. adapt the workforce to new technology by upgrading skills and retraining 3. accelerate the deployment of new technologies through establishing an intermediate role in several forms 4. establish networks of learning companies and learning communities. The OECD (2000a, p. 10) thematic review suggests that special transition policies are needed. It seems that systems in which students are evenly spread over three principal pathways (apprenticeship, school-based vocational or general education) have advantages in achieving effective transition outcomes, because the young have wider choices to integrate into society. But the study also points out that transition policies cannot be made effective in a vacuum. Successful transition systems need a healthy economy and well-organized pathways that connect initial education with work and further studies. What has been done in this respect in OECD countries includes the following examples: diversified links from vocational training to tertiary education; increasing vocational content in general education; delaying specialization and
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decreasing the number of vocational programmes but making them broader; increasing liberal content in vocational training; creating modular curriculum structures and personal curricula; and expanding the non-university sector of higher education.
11.3 EDUCATIONAL REFORM AND FEATURES OF THE POST-REFORM SYSTEM IN FINLAND The Finnish vocational education system was reformed in the 1990s. The structure of vocational education has been harmonized, and the responsibility has been moved to the local authorities. VET providers have been organized regionally and are assumed to improve their relations with industries. In general an essential argument has been that of raising the standard of education. The establishment of the polytechnics2 has been described as the biggest reform of the educational system ever (Lehtisalo and Raivola 1999). The reform has mostly been justified by pointing to the needs of working life and the international competitiveness of Finnish industry. Looking at the history of the polytechnics could make some of the contemporary features of the system and policy intentions more understandable. The Finnish education system was in crisis in the 1980s. One of the biggest problems for educational planners was the rising number of matriculants. Even if university education had been expanded, there were not enough study places and the best students were selected by the principle of numerus clausus (a fixed quota). In addition, the vocational education system seemed too hierarchical and it consisted of hundreds of small sectoral institutions. The status of vocational colleges varied, and international comparison considered this a difficult problem. Also, the administration was centralized and the flexibility of an individual VET provider was quite limited. The system was, or perhaps may still be, very institution-centred, and co-operation with industry and other policy-makers was fairly formal on the local level (Lampinen and Savola 1995; Lehtisalo and Raivola 1999). Figure 11.1 concentrates on highlights of the recent Finnish educational reform. The influences and challenges came from many sources; EU membership was expected to push the Finnish educational system to harmonize its structure. Changing industrial structure needed new kinds of competencies, and new concepts of learning challenged formal education. Recovery from the depression at the beginning of the 1990s and the discussion of the role of the national state as a service provider could also be mentioned as factors behind the reform.
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Political and international trends
New concepts of learning and innovation
Crisis of former VET system
Industries
Challenges for new orientation and action
Pressure for educational system and policy
Changes in occupational structures and qualifications
Multidisciplinary, regional and work-related VET provider
Institutional reform
More relevant, network and future-oriented curriculum and internal structures
Cultural reform
New regional and innovation-oriented methods of teaching and learning
Practical implementation of reform
Competent labour force for learning society
Figure 11.1
The Finnish VET reform in the 1990s
The reform could be analysed on three levels: institutional, cultural and practical. As the downward pointing arrows show, the reform was started at the top by governmental decision and flowed slowly to the practical level. The best known institutional reform is the establishment of the polytechnics, but at the same time upper secondary VET has gone through major changes. A great number of institutions have merged into multidisciplinary institutions, the autonomy of the institutes has been increased; providers are more guided by results on a contract basis; and the state-owned institutes have been transferred to the municipalities. The institutional reform is mostly guided by legislation and central administration. On the local level the authorities have organized the new structures by themselves. One of the main issues of cultural reform is a reform of the curriculum. The aim of the reform was to make training more flexible and sensitive in order to adapt to rapid changes in industry and society. Modularization has been another principle; it increases flexibility in studies. An important challenge of the reform was to create a common institutional culture. The merged institutes were expected to achieve educational synergy, for example to create new degree programmes linking different fields of education. A new community is also assumed to support cross-institutional network activities.
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The aim of the reform could in essence be that VET should provide a highly competent labour force for the learning society. The institutional reform and organizational culture could support the system but the main factor is the practical implementation of the learning process. In general the VET reform has been used as a policy instrument to respond to the challenges of the learning society. The main objectives have been: 1. 2. 3. 4. 5.
raising standards of education decentralization and strengthening of VET providers’ autonomy curriculum reform and open learning environment contribution to regional development improvement of relations to industry.
One of the main tendencies of Finnish educational policy has been to improve the level of education throughout the whole population. The expansion of upper secondary general education in the 1980s was one phase of this process as well as the decision to offer continuing education for all school-leavers. From the 1970s onwards the educational level of the labour force in fact rose to a completely new level. The number of highly educated persons more than doubled and the share of the labour force with less than an upper secondary education was halved in a good 25 years (Statistics Finland 1999). The policy goal of raising the level of education is to be achieved by the following. Former VET colleges to be upgraded to the polytechnic level. The polytechnics are defined as a non-university sector of the dual higher education system. Upper secondary vocational education should give eligibility for further studies. The supply of higher education will cover around two-thirds of the age cohort and upper secondary education will be offered to the whole age group. The duration of education will increase in all forms of VET. The level of academic qualifications of the VET teachers will be raised. Occupational and degree-oriented adult education will be emphasized (Salminen 2001, p. 53). A common characteristic of the reformed legislation has been a general relaxation of state control and an increase in local decision-making powers. The state control is focused on the effectiveness, quality and evaluation of education. The Ministry of Education and each VET provider have concluded an agreement on target outcomes in order to determine the objectives, intakes, and funding. Increased responsibilities of the local authorities are among the ways to improve co-ordination between local industry and VET institutions or polytechnics. Curriculum reform is a tool used to update training qualifications. Until the 1990s the basis of the curriculum was subjects, courses and a common schedule. On both levels, upper secondary and polytechnic, the curriculum reform followed the same guidelines. The structure of the individual study programme
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is unified similarly in each sector and modularization is to give a student an opportunity to select optional modules from other programmes or institutes. Training is arranged in seven fields of education: natural resources, technology and transport, hotel, catering and home economics, administration and commerce, health and social services, culture and humanities and teaching. The upper secondary VET curriculum system was reformed in 1995. The national core curricula give the VET institutions loose frameworks in which to develop their functions according to local needs and the preferences of the students. The duration of all these programmes is three years and all of them include a period of on-the-job learning of 20 weeks. The polytechnic reform itself is a curriculum reform; the structure and content of the degree programmes were reviewed. The Ministry confirms the degree programmes, but each polytechnic defines its own degree programmes, which consist of basic studies, professional studies, optional studies, on-the-job training and a diploma project. To complete the polytechnic degree takes 3.5–4.5 years of full-time study. An important argument for the polytechnic system is more focused regional development and co-operation with small and medium-sized companies. The former isolated sectoral institutions did not have any special regional orientation. Traditionally Finnish educational policy-making has been organized in quite a corporative way. The representatives of the industrial sectors have been incorporated into the public education administration and their indirect impact has also been significant. The sectoral representatives are still important actors to link industry and the education system via Sectoral Education Committees. 11.3.1
Finnish Educational Policy at the Beginning of the 21st Century
At the beginning of the 21st century a new aspect of educational policy is policy integration. Educational measures are more aimed at supporting the national industrial and technology policy. The government adopts a plan for the development of education and university research every fourth year (Ministry of Education, 2000). This main policy instrument is prepared in close co-operation with political parties, labour market and industrial organizations, educational and research institutions. The plan underlines the need to take citizens’ rights and opportunities into account in all education and training. Achieving the objectives set for the performance of the education system, for regional access to training, for equal opportunity and for educational content requires public input into education and research. The education system will meet the adult population’s need for education, and it will raise the employment rate. The government also emphasizes education as a promoter of the information society: ‘Knowledge and know-how form the basis of economic
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competitiveness and the welfare of society as a whole. Finland’s success is based on high-standard education and research, innovative know-how and the utilization of modern information and communications technology’ (Ministry of Education 1995). The national information society strategy for 2000–2004 stresses that educational establishments and universities should function as innovation centres. The education establishments should improve their roles as knowledge centres; they are also expected to transfer and even produce innovations, not only produce a basic qualified labour force. Educational establishments will have greater responsibility for preventing social exclusion. They should be increasingly open to serve the educational needs of all age groups. Students will be especially supported in the transition phase between different educational levels. 11.3.2
Finnish Polytechnics – A Reform from which Much is Expected
The Finnish polytechnic reform follows the European tendency of expansion of higher education. The reform was a national project (Lampinen 1998; Salminen 2001), it was justified by national arguments and mostly national premisses structured the model. An essential statement of the reasons for establishing polytechnic education was derived from the need for a highly trained workforce in the labour market. It is underlined by the doctrine adopted that the polytechnics should be more professionally oriented than the universities. ‘Higher education will consist of two kinds of institutes; practically oriented polytechnics (non-university sector), and science and art universities (university sector)’ (Opetusministeriö 1993). In this dual system, polytechnics differ from universities not only in terms of degrees, but also in administration, job structures, ownership and financing. A fairly radical objective of the reform was that openings in higher education would be offered to two-thirds of the age group. The formulation of the Finnish system has been influenced by the education systems of other countries. As regards the degree system, it mainly resembles Dutch and German institutions. The structural reform of higher vocational education was completed in August 2000. At the moment the number of multidisciplinary polytechnics is 31. The former VET colleges (over 250) have been combined to form polytechnics. Besides the polytechnics, Finland has 20 universities – ten multi-faculty institutions, six specialist institutes and four art academies – all of them engaged in both education and research. Thus the higher education network consists of 52 institutions with plenty of satellite centres located around the country. The OECD indicators show that the number of expected years spent in tertiary education for all 17-year-olds is rising rapidly as a whole. The country mean of expected years in full-time programmes is 2.0 years, while in Finland it is
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Higher education
Universities
Polytechnics Adult education
Upper 3 secondary years education
9 Basic education years Figure 11.2
229
Upper secondary schools
Vocational schools and apprenticeship
Comprehensive schools
Finnish education system
3.8; the highest value of all. Behind the high ranking is the fact that the Finnish system is based on full-time study and long-term degree-oriented programmes. In the present Finnish educational debate the drop-out rate and the length of the studies are in focus. ‘On average across OECD countries, about a third of all entrants leave tertiary education without completing a degree – but this varies greatly between countries: in some countries only a minority of entrants complete the course; in others almost all do’ (OECD 2000c). In Finnish universities the survival rate is 75 per cent. No follow up statistical information on an age cohort regarding completed polytechnic studies is available. But it is widely known that the polytechnics are worried about the small number of completed degrees. According to the numbers, slightly more than half of the students have achieved that goal in a normative schedule. The new polytechnics have undergone rapid growth; when the experiment started in 1992 there were some 6700 new entrants, while the total intake in 2000 was over 33 000. The education system offered entrance on the higher level to 50 000 and at the upper secondary level to 97 000 new students (see Table 11.2). The age cohort is currently around 64 000. The relation between the number of annual student places and the size of the age group illustrates that the supply of the education seems to be excessive. It is based on policy to secure further studies for all school-leavers and higher education for two thirds of the age group. The forecasting of the educational supply has traditionally been a problematic task. Many conflicting interests exist in society; the interpretation of demographic factors, regional development, and industrial change are not sufficiently known for anticipating the future needs for the labour force. Not even the internal factors of the education system are known. The national
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forecast report shows that the intake of students to the polytechnics is excessive while the upper secondary VET provision is in balance in general (Autio et al. 1999). In fact, the total number of secondary VET supply is so high that many providers suffer from a lack of students, especially in the fields of metal industries and construction. Table 11.2 Supply of education in upper secondary and higher education in Finland 1999 General upper secondary schools Upper secondary vocational schools
39 900 57 400
Upper sec. ed. 97 300
Polytechnics, AMK Universities
30 800 19 400
Higher education 50 200
Source:
National Board of Education (1999), KOTA database (2000)
The supply of the polytechnics is more industrial and business-oriented than the universities. The fields of technology (32 per cent) and commercial studies (28 per cent) dominate the supply; they present 60 per cent of the whole polytechnic sector. The interests of young people and the ministry-steered supply of higher education do not match. The most popular sectors, culture and humanities, have up to ten times more applicants than the annual enrolment. As a consequence of the expansion of engineering education, this is the easiest sector to access: every second applicant gains admittance, and some peripheral polytechnics suffer from a lack of technical students. Looking at the demand for labour force in the group of the higher educated, it seems that paradoxically the placement of graduates in the most popular sectors on the labour market is worst and a completed technical degree has been a key to success on the labour market.
11.4 POLYTECHNICS IN ACTION – FEATURES OF RESTRUCTURED HIGHER EDUCATION The study on which this chapter is based was researching the role of the VET entity in the innovation system, the role of polytechnics as an active partner of the regional network, and the forms of network and interaction built up by VET providers. The aim was to identify both structural aspects and forms of action of the VET system as a partner of the learning community and as an actor in the innovation network. As Figure 11.3 shows, the main partners of the individual provider could be other educational institutions, regional agencies, industries and the public sector, and universities and research organizations.
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There are formal and informal connections between partners, actors could be administrative staff, teachers or students, and increasingly students write their theses for companies, co-operative projects are implemented, and on-the-job training is an obligatory part of studies.
Education system Mobility of students and teachers Supply of optional studies Internal and external co-operation International/domestic exchange programmes Continuing studies for teachers Visiting experts Co-operative projects (Student exchange) Universities and research organizations
Industries and public services
Polytechnic or secondary VET provider
On-the-job training In-service training Theses Retraining Teachers’ enterprises R&D services Visiting experts Participation in strategic planning Sectoral and regional projects Centres of expertise Regional surveys
Regional development agencies
Figure 11.3 A framework for network analysis of VET institutions: Actors and forms of interaction 11.4.1
Selected Findings of Our Study – Contradiction between Official Rhetoric and Practice
A key instrument of the steering of the learning process is a curriculum. This notes the fields of future competence and the logic of the learning process and it should also be a basis of interaction between the business environment and the polytechnic. On the rhetorical level curriculum reform is accorded high priority. In fact, the polytechnics have modernized programmes and launched some new interdisciplinary programmes, which should take advantage of the synergy benefits, but in many cases the new curriculum is only a disguised version of the former one. Polytechnics utilize their multidisciplinary resources by supplying the studies common to all students. Students have exercised their
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freedom of choice very little, however. According to our interviews the majority of the optional courses are still chosen from the student’s own educational unit. According to the interviewed teachers, the thesis is now more extensive, more functional, problem-based and working-life-oriented than before. Depending on the field of study, the thesis may be development work, a software project, a cost-effectiveness analysis, market research or a traditional literary thesis. The technology and natural resources sectors have been most active in doing theses in co-operation with industrial life. In the social service sector less than 50 per cent of theses are written with representatives of working life (see Figure 11.4). Technology and transport Natural resources Hotel, catering and home economics Administration and commerce Culture Humanities and teaching Health and social services
0
20
40
60
80
100
% Source:
AMKOTA database (2000)
Figure 11.4
Working-life-related theses
In addition to a thesis and practical training, there are other study modules that are carried out in co-operation with industries. In the social and health care sector students participate in projects with local authorities and the third sector. In the field of logistics students have planned logistics chains or organized internal production. Design students have planned aids for the disabled and furniture. In the field of natural resources they have carried out participatory EU projects. Most of the students with experience working in a project have been very satisfied. The increasing amount of project work concerns some students who have experiences of poorly organized projects and non-functional project teams. One important objective was to create new degree programmes linking different fields of education. For example, a degree programme in product development and design has been launched by combining the curriculum of the mechanical engineering programme and that of the design programme, or
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a new programme in agricultural marketing consists of studies of commerce and agriculture. Our interviews suggest that at the moment the polytechnics are creating forms of internal co-operation. Critical points were also expressed. The main problems here in the multidisciplinary polytechnic are the different viewpoints, starting points and objectives. If you compare, for example, the education in the field of social and health care or music to the technology sector, hard technology, they are so far away from each other. There are a lot of matters which it is not possible to adjust, but maybe it is possible to find some synergy benefits. (Polytechnic lecturer on technology)
The utilization of multidisciplinary teaching is theoretical; in practice the students move very little between different units. The reasons are partly students’ interests, but it depends greatly on the organizational problems of education, such as long distances, overlapping timetables and lack of information. The following example illustrates the situation from the viewpoint of an electronics student: In principal we have the right to choose optional studies from this school or the health care institution or the business school but arranging the courses to our timetable is very troublesome, it does not work. I hope the options to take optional studies from other units or educational institutes will be improved in future. (Polytechnic student on electronics)
The co-operation within the unit between neighbouring degree programmes seems to be more active than the mobility between different units and fields of education. It is usual in the technology sector especially to co-operate more closely with the other units of technology in different polytechnics than with the different fields of education in one’s own polytechnic. At the moment the polytechnics cover the country and more than 250 institutions have been integrated into them. There were many expectations that these regionally organized institutions should be more flexible in order to react to regional development and industrial change. Polytechnics especially are expected to produce new study programmes based on their own system for forecasting the training needs of the industries. The importance of polytechnics increases in the regional networks if there is no university-level teaching and research available in the field. The regional centres of expertise are also important co-operation channels for educational institutes; most of the regional actors like towns, universities, associations and enterprises participate in the activities of these centres. Forms of co-operation between polytechnics and local business life are underway. Our interviews showed, however, that it is important to increase the
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networks between education and regional actors because the polytechnics seem to be still quite unknown phenomena to employers. The regional role of the polytechnic can be defined by the provincial recruitment and employment of students. There are different strategic roles among polytechnics; some institutions get students from their own region and the graduates also find jobs in the same region. In the opposite situation are those polytechnics that recruit students from outside their established region and most of the students leave the region after completing their studies. It seems that the goal of improving co-operation between polytechnics and industries is best achieved during the thesis-writing and practical training, usually a period lasting at least six months, which is often the most important way for students to get contacts with employers. Most students have been very satisfied with their practical training periods, but they hope that the polytechnics would co-operate even more actively with partners in working life. The research and development activities of the polytechnics are freely defined in law. They are able to carry out R&D that advances activities and supports working life. Our interviews show that the most common form of R&D services is in-service training, which is offered to adult students. Some polytechnics’ R&D services also include projects with local industries, consultation, market research and construction planning. An important channel is the polytechnic teachers’ contacts with working life. They have informal networks involving firms and organizations via their previous workplaces, their own enterprises and organizational activities. More formal relations to business life have been created in boards and development activities. Teachers also utilize their contacts when they invite visiting lecturers. Most students have visited companies and they also consider meeting visiting experts to be important. The universities and polytechnics form a parallel higher education system. At the moment there is not much co-operation between the polytechnics and universities. They are competing educational channels for the students. According to statistics, movement between the two higher education systems is not very common, however teachers’ postgraduate studies are a major form of co-operation between polytechnics and universities. New pedagogical methods have been adopted in polytechnic education. The number of traditional lectures has been diminished and the focus is more on team and project work, which improves students’ problem-solving skills. Teachers emphasize the multidisciplinary and research-based approach of polytechnic teaching with the constructivist conception of learning in the background.
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Projects have increased enormously, project working and working in the field. Secondly, there are more independent study tasks and the tasks are wider and higher in standard. (Degree programme leader)
The polytechnic reform also requires raising the teachers’ educational level. Teachers are required to have three years of work experience and a postgraduate teaching certificate. The Master’s degree is required for lecturers, while head teachers have to complete the licentiate or doctorate. During this five-year period the number of teachers with postgraduate degrees has increased 50 per cent. I sometimes feel that teaching is a minor point; you should participate in different kinds of projects, international activities, development teams etc. Teachers also have to complete pedagogical studies and a licentiate thesis. It must inevitably show in the quality of your teaching. (Common opinion of interviewees)
The polytechnics have also developed practices by increasing the amount of international co-operation. In total 3622 Finnish students from polytechnics were abroad for study or training in 1999. Students’ experiences from the periods abroad have mainly been very positive. 11.4.2
At the Midpoint of the Polytechnic Reform
The reform of Finnish postsecondary education is at its midpoint. The former system has been closed down and a new system of higher education is functioning completely. An architect of the Finnish reform emphasized that the main doctrine of our system is dualism (Lampinen 1998). He warned of a dangerous academic drift, that academic suction could lead to assimilation, which happened in the UK. There are two aspects of suction; first, the polytechnic teaching and R&D activities could copy the university model and second, the polytechnics could adopt university-like ceremonies, names of departments, degree systems or occupational structure. According to our study, it is quite easy to find many aspects indicating academic drift. The last debate concerns further degrees, the title of the degree and the equivalence to the Master’s degree. The status of the polytechnic degree and comparison with the university degrees as well as the path from one sector to the other are quite unclear. It seems that for both sectors strengthening their own profile could be the best way to clarify their respective functions. In fact, the polytechnic network is quite the same as the network of the former VET system. Thus the network is not able to utilize all the synergy benefits; there are still a lot of practically isolated units all over the country. Another cause of the establishment process, based on the former institutional network, is that there is no possibility for specialization; the teachers of the small units have to be some kind of generalists. The effect of the reform has been felt
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mostly on the administrative level. The new system has been established but its role as well as the network is under construction on the macro level. In addition, on the system level, the development and the reconstruction of the institutional culture of an individual polytechnic is perceived as a major challenge. Jaatinen (1999) has stated that the organizational cultures in the various fields of education vary. These cultures are based on assumptions, for example, of the identity and the role of the polytechnics and the tradition of the field. She argues that social services with humane values and technology attached to the prereform high status of it represents the extreme end among the fields of education. Our study also shows that the reform has meant conflicting processes in the polytechnics. In the best cases the polytechnics have constructed new forms that really integrate educational sectors and the industrial sector. It seems that the utilization of multidisciplinarity needs innovative structures and new pedagogical thinking. On the strategic level regional aspects are highly valued and the management of the polytechnics is integrated into the regional network. In many cases the regional orientation did not affect the level of ordinary teachers or students. The institutions have opened up and they promote their industrial orientation. There are still some weaknesses; the interaction between partners is quite formal. On the other hand, in many cases the contacts are based only on personal relationships. Finnish industry has no tradition of contributing to the training with real inputs. 11.4.3
A Few Notes on Upper Secondary Vocational Education
The people’s high estimation of higher education together with the ‘very complete’ education system causes problems in the arena of practical knowhow. University students and a great majority of polytechnic students come from upper secondary general schools. In many cases, these students do not have any work experience. In point of fact, the polytechnic reform of the 1990s seems especially to have lowered the status of practical skills in the work of the educational system. In addition, the Finnish VET has been taking place mostly in educational institutions; apprenticeship training has covered less than 10 per cent and the share of industry-owned training centres is low. The goal is to increase the share of apprenticeships to 20 per cent of the initial secondary VET. The most fundamental question is the attraction of upper secondary education. Raising the appreciation of VET schools is not about advertising and image building. It is a question of employment opportunities. It is true that young people from secondary VET education do not get jobs as easily as graduates from other educational routes. Perhaps the new on-the-job learning periods will open more gates to working life for VET students. However, upper secondary
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vocational education is the only education route that today can offer at least some kind of practical on-the-job education for young people under 19 years old. Those having a polytechnic degree also criticize the studies for being too theoretical (Tulkki 1997). One possibility is to make practical studies or experience in working life a requirement for the new students in polytechnics. On-the-job learning is not felt to be part of the school; it is rather a question of something administratively ‘obligatory’ that is imposed from outside and of getting used to it. The changes of the 1990s opened up opportunities for business life to engage in active co-operation with the educational institutions, but these opportunities have not yet been much utilized. All in all the startup of on-thejob learning will clearly serve to draw learning in colleges and learning through apprenticeship closer together. On-the-job learning can create vistas for teachers in educational institutions on the routine work and learning accomplished in the workplaces and also increase the teachers’ contribution at the workplaces as resources to support know-how. It also opens up the prospects of the educational world for use in the development work of working life. Large-scale mergers have been found to increase the internal activity of the educational institutions, but also to hamper external relations, for example collaboration with industries. After a merger, the main attention is generally focused on harmonization of operations in the institution and the creation of a common institutional culture. In many cases merged institutions are no more than administrative arrangements of umbrella organizations, while the old institutions continue to operate in their traditional ways. The establishment of the polytechnics caused, in some fields of education, the disintegration of work communities that had been particularly uniform. Earlier teachers were in the habit of working with several groups of students regardless of ‘differences in level’. The reform broke up the tradition and divided the teachers on the one hand into lecturers at the polytechnics with higher status and on the other into those who are continuing in less valued secondary-level vocational education. Although there are some problems of ‘distinction’ and ‘divergence’, co-operation between secondary educational institutes and polytechnics is currently increasing. Moreover, there is concern in the teachers’ discourse about a downswing in student grades. Possibly the reason for this anxiety is a consequence of the changes in the education system; the students in VET schools are now younger than before and have no work experience. In some VET schools, motivation and participation in studies play a decisive role in channelling students into training; the best and most highly motivated students do their on-the-job training periods in the best companies. The new approach can promote apprenticeship education, school-based enterprises, workshop schools and other alternative forms besides traditional school-based education, which has also now changed its direction towards practical learning. This kind of an approach combines work against
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social exclusion with the enlarged production of a skilled labour force. Education is taking its natural place as a producer of social inclusion.
11.5 CONTEMPORARY CHALLENGES AND DEVELOPMENT OF EDUCATION Structural reform has officially been completed. The study shows that there are many problems and open questions originating from the former system. The status and relation of the individual parts of the reformed system are unestablished. Horizontal and vertical integration and mobility are unclear, and in practice, there exist a lot of structural friction and attitudinal boundaries. In addition to the demand for structural improvement, the cultural and pedagogical reform is unaccomplished. The Finnish polytechnic sector was evaluated in 2001 by an OECD examiner group called by the Ministry of Education. The main argument of their report emphasizes that the Finnish polytechnic policy has been remarkably successful and they do not see a need for fundamental changes to the AMK policy. (OECD 2002, p. 19) The recommendations of the OECD examiners are, naturally, quite detailed and administration-oriented. Their main suggestions conform with our analysis and proposals. Based on the findings of our study, various development tasks need to be addressed; the educational system has to respond to the following challenges. In the learning society, education and industries have to produce the required competencies in co-operation. In the Finnish case, this will mean a new kind of orientation; both partners have to commit themselves to producing competencies and to taking the responsibility for learning. The supply of formal education has probably reached the quantitative maximum in Finland. Forthcoming improvements should be targeted at the qualitative relevance of the supply and the flexibility of the system. The reformed education system is based on a sequential model; in practice, it means that more than half of an age group is studying up to the age of 25. Alternative ways to organize higher education should be to improve the basis of the lifelong learning and work-related learning. Increasing integration and flexibility will facilitate the effective use of resources. The established dual higher education system is still developing and it seems that the principle of parallel institutions has been implemented so far. However, there are tensions and open questions between polytechnics and universities. The risk is that both institutions will lose their own characteristics. They should
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compete through their own strengths and improve the transition between polytechnics and universities. There are 52 higher education institutions for five million people with a young age group of 60 000. Higher education with small units is not an effective way to organize a network; the assumed synergy benefit and concentration of expertise cannot be reached. The polytechnic network should be reorganized by strengthening regional and/or sectoral orientations and by favouring more specialized units. The organizational culture of vocationally oriented education is changing. The regional contribution and capacity for monitoring environmental development vary a lot among individual institutions. Wide and lively relations with industries should be improved, especially with the SME sector. Building up social capital has become an essential issue to be addressed in the learning society. Providers should develop new, alternative forms of training for the needs of different age and occupational groups and local industries. In addition, the inclusion-oriented training will need versatile pedagogical methods, which accommodate the needs of different groups and individual trainees. Finnish education is strongly degree-oriented and the actual duration of the completed degrees is longer than the normative duration. The scheme of the degree system should be improved to become more flexible. The transition from higher education to the labour market and back to education should be made more acceptable. The lack of students in upper secondary vocational training and the overloading of the polytechnics will have an effect on the labour market. This causes a problem of an overqualified labour force as well as educational inflation. From this point of view, it is reasonable to invest more in developing upper secondary vocational education as a competitive route into working life besides tertiary education. The Finnish labour market seems to follow the model of the transition labour market. The formerly stable careers of educated people are breaking up and, on the other hand, people seem to make more atypical individual choices. Expanded higher education is no longer a key to higher positions; the selection function has moved from the education more to the labour market. Education is, more than before, a supporting mechanism.
NOTES 1. This chapter is based on the report Producing Competencies for the Learning Economy for Sitra’s Research Programme on the Finnish Innovation System (Raivola et al. 2001). 2. A polytechnic is called in Finnish ‘ammattikorkeakoulu’ or AMK; the name has been translated into English also as an AMK institute or AMK system.
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REFERENCES AMKOTA database (2000), a statistical database of the polytechnic system maintained by the Finnish Ministry of Education. www.csc.fi/amkota/ Autio, Veikko, Ilpo Hanhijoki, Jukka Katajisto, Matti Kimari, Leena Koski, Jukka Lehtinen, Seppo Montén, Ulla Taipale and Anneli Vasara (1999), Ammatillinen koulutus 2010, Työvoiman tarve 2010 ja ammatillisen koulutuksen mitoitus, Helsinki: Opetushallitus. Cameron, Rondo (1995), Maailman taloushistoria, Porvoo: WSOY. Eurydice (2000), Two Decades of Reform in Higher Education Europe: 1980 onward, European Commission, Education and Culture, Eurydice Studies. Jaatinen, Päivi (1999), Synergian siemenet ja torajyvät: Tutkimus monialaisen ammattikorkeakoulun organisaatiokulttuurista, Turun yliopiston julkaisuja sarja C 148. KOTA database (2000), a statistical database of the university system maintained by the Finnish Ministry of Education, www.minedu.fi/minedu/education/ KOTA.html Lampinen, Osmo (1998), Suomen koulutusjärjestelmän kehitys, Helsinki: Gaudeamus. Lampinen, Osmo and Marja Savola (1995), ‘Ammattikorkeakoulujen kehittämisen vaihtoehdot’, in Osmo Lampinen (ed.), Ammattikorkeakoulut – vaihtoehto yliopistoille, Tampere: Gaudeamus, Otatieto, pp. 11–25. Lehtisalo, Liekki and Reijo Raivola (1999), Koulutus ja koulutuspolitiikka 2000-luvulle, Juva: WSOY. Lundvall, Bengt-Åke (1999), ‘Understanding the Role of Education in the Learning Economy: The Contribution of Economics’, in CERI/CD (99)10: Knowledge Management in the Learning Society, Paris: OECD. Ministry of Education (1995), Education, Training and Research in the Information Society – A National Strategy, Report, Helsinki: Ministry of Education. Ministry of Education (1998), Higher Education Policy in Finland, Helsinki: Ministry of Education. Ministry of Education (2000), Education and Research 1999–2004, Development Plan, Helsinki: Ministry of Education. National Board of Education (1999), ‘Education System in Finland’, www.edu.fi/ info/system/english/ Niewenhuis, Loek (1998), New Developments in Qualifying Strategies for Sectoral and Regional Innovations, STOAS, Studies into Education and Employment, Wageningen, The Netherlands. OECD (2000a), From Initial Education to Working Life: Making Transitions Work, Paris: OECD. OECD (2000b), Knowledge Management in the Learning Society, Paris: OECD. OECD (2000c), Education at a Glance: OECD Indicators 2000, Paris: OECD. OECD (2001), Cities and Regions in the New Learning Economy, Paris: OECD. OECD (2002), Review of Education Policy in Finland: The Polytechnic Sector, Examiner’s Report, (For Official Use), DEEELSA/ED(2002)7. Opetusministeriö (1993), Koulutuksen ja korkeakouluissa harjoitettavan tutkimuksen kehittämissuunnitelma vuosille 1991–1996, VNp 18.3.1993. Raivola, Reijo, Kari Kekkonen, Pasi Tulkki, and Anu Lyytinen (2001), Producing Competencies for the Learning Society, Sitra Reports Series 9, Helsinki: Sitra. Rosenfeld, S. (1998), ‘Technical Colleges, Technology Development and Regional Development’, Paper presented at the OECD conference ‘Building Competitive
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Regional Economies – Upgrading Knowledge and Diffusing Technology to Small Firms’, Modena, Italy, 28–29 May 1998. Salminen, Hannele (2001), Suomalainen ammattikorkeakoulu-uudistus opetushallinnon prosessina: Koulutussuunnittelu valtion keskushallinnon näkökulmasta, Opetusministeriö, koulutus- ja tiedepolitiikan osaston julkaisusarja 81, Helsinki. Statistics Finland (1999), Education in Finland – Statistics and Indicators, in H. Havén (ed.), Helsinki www.stat.fi/tk/he/edufinland/ Tulkki, Pasi (1997), Polytechnic, Employment and Future of Satakunta, [Ammattikorkeakoulu, työllistyminen ja Satakunnan tulevaisuus], Satakunnan va. ammattikorkeakoulun seurantatutkimuksen V osaraportti, Satakunta Polytechnic, Application Reports, Series A.
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12. Education as an asset in the labour market Asko Suikkanen and Ritva Linnakangas 12.1
INTRODUCTION
Many scholars assert that the past decade has seen the emergence of a newly structured labour market in many European countries. The phenomenon at hand is the prolonged fragmentation of employment and, in Finland for example, a differentiation of participation in employment that began back in the 1980s. Researchers of working life speak of an intensification of selection and a shift in the functional nature of the labour market with respect to the character of the employment relationship, the expansion of informational work and heightened competition in working life. In broad terms, what is at issue is the significance of society’s different subsystems and a transition to a social order that is more relative in many ways. This order has also rendered labour market citizenship (on the concept see Barbalet 1988; Marshall 1950; Suikkanen and Viinamäki 1999) more contingent than heretofore. This chapter proceeds from the assertion that these developments signal a change in the societal relationship between working life and different actors. We reflect on the interaction between working life and education. The topic is a significant one, for the question of how education can best support individuals’ entry and return to working life has become an increasingly central concern. The issue has become topical in a new way because one can no longer rely on the old ‘certainties’ to cope in working life. At the societal level, the new structures are with us already, but for many people participation in the competence society is still only a dream. The empirical material discussed in the chapter comprises register data compiled by Statistics Finland on individuals in the Finnish labour force between 21 and 64 years of age (5 per cent sample) for the period 1988 to 1998.
12.2
CONTEXT: INCREASED UNDEREMPLOYMENT
Up until the 1990s, once individuals had entered the labour market, they generally became attached to it permanently. The functional models of social 242
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policy, including educational policy, contributed to guaranteeing people permanence, certainty and security. Vocational education was mainly a oneoff undertaking that determined the opportunities people would have over the course of their careers. The labour market could renew itself as long as young people had a better education than older age classes. And this was the type of development supported by education policy in Finland through a focus on education for young people. The educational level of young age classes in Finland has risen rapidly and today continues to compare favourably with that in other countries (Eurostat Yearbook 2002, pp. 95–6). Today’s labour market does not adhere to the logic of normalcy and stability seen in the past; rather, losing one’s job or having inadequate or outdated vocational skills results in increased uncertainty for an individual. In the late 1980s and early 1990s, in the Nordic countries as well as in many other parts of Europe, one began to hear of a change in the societal conditions of employment (Beck 1992; Gonäs 1988; Koistinen and Suikkanen 1988) and this discussion has continued – albeit polarized – into the 2000s. Some consider the return of full employment a possibility, and a desirable one, or at least do not believe that unstable employment will increase in society (see World Employment Report 2001). On the other hand, those who would emphasize the shrinking labour market consider underemployment to be permanent and see society entering a phase where a return to full employment is impossible. Depending on the researcher’s perspective, this is assumed to take place in different ways. Examples include ‘fragile’ (Beck 1999, p. 4) and ‘new’ (Schmid 1998, p. 4) full employment, both terms referring to the yielding of traditional full employment. Our own research findings (Suikkanen 1999; Suikkanen et al. 2002), too, indicate that the improved employment seen in Finland in the late 1990s meant increased underemployment vis-à-vis the situation in the 1980s. The typical, so-called normal employment relationship was traditionally fulltime and regular (Córdova 1986, 642). In the welfare society this was a crucial element that allowed people to cope financially and socially in different phases of their lives and in the face of different risks. Nowadays we are witnessing exceptional practices on the labour market and have seen an increase in the diversity of ways in which people participate in that market. For an increasing number of individuals fragmented participation has become the norm, and what used to be unbroken periods in their life courses are now fraught with interruptions and threats of fluctuating circumstances. In 1998, 80.5 per cent of Finnish employed wage-earners aged 21–64 years were employed full-time for the whole year. In Table 12.1 we can see that only in the case of employed wage-earners has the share of normal employment remained around 80 per cent in the 1990s. In the case of people belonging to the labour force, the share of people in normal employment decreased until 1995. In 1998 the figure for the labour force aged 21–64 years was 60.5 per
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Table 12.1 The share of Finnish people in normal employment calculated with reference to different groups Year
Persons
Share among employed wage-earners
Share among the labour force*
Share among the labour force
1988 1990 1992 1994 1995 1996 1998
1 549 500 1 559 440 1 371 540 1 246 140 1 244 960 1 305 100 1 408 660
82.0 82.2 83.3 79.6 78.2 80.8 80.5
77.3 77.0 67.3 62.3 61.7 64.2 67.5
66.7 66.4 58.8 54.5 54.6 57.1 60.5
* entrepreneurs excluded
cent, and when entrepreneurs were excluded the figure was 67.5 per cent (Table 12.1). While unemployment has generally decreased, the share of normal employment has not increased significantly. The improvement in unemployment does not seem to increase normal employment, since short and temporary employment, as well as underemployment, has become more common (see Suikkanen et al. 2002, pp. 96–8). In this case the Finnish trend follows more general European developments.
12.3
A CHANGE IN THE SYSTEM OF PARTICIPATION
In the labour market, it is increasingly rare to find an explicit norm based on the notion of permanent employment that an individual might rely on. We have interpreted these changes in participation in employment to be an intensified process of differentiation and selection. This process entails a change in the system of participation, because underemployment has made social exclusion more common and the differentiation of participation has increased as a factor dividing the labour force. Education alone is not sufficient if one is to survive in the labour market; it is one means to maintain one’s eligibility in the market. It entitles everyone who has it to be available should the market need them. What we see here are new terms for success, as the areas of competence and the knowledge that brought success in the labour market when employment was high are no longer necessarily sufficient.
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In the occupational structure of Finnish labour we can trace a change showing that occupations requiring lots of education and skills have become more significant. The number of tasks requiring managerial and expert skills has increased and that of routine-like positions has decreased. In a period of less than ten years the share of scantily educated people has diminished substantially (Table 12.2). An individual is not able to maintain a knowledge- and functionwise stable position for a long period unless she or he acquires new skills and updates her or his old knowledge continuously. Table 12.2 The development of employment according to educational levels in the years 1988–1997 in Finland Variable The number of employed wageearners in the year 1988 % Change in employment % 1988–1990 1991–1993 1994–1997 1988–1997 The number of employed wageearners in the year 1997 %
Lower Comprehensecondary sive
Polytechnic/ Upper secondary University
Total
640 080 33.9
601 640 31.8
373 820 19.8
274 020 14.5
1 889 560 100.0
–6.1 –21.9 –7.6 –41.5
1.0 –14.5 5.7 –14.2
5.1 –9.9 17.0 9.1
8.2 0.7 21.0 42.5
0.4 –13.1 7.9 –10.6
374 580 22.2
516 060 30.6
408 020 24.2
390 560 23.1
1 689 220 100.0
At the same time, when the qualifications needed in work increased, the return to work appears to have become more difficult. The chances to find a job in the early 1990s was weakest for people with little or no education. Yet in the case of the latter group their share of the labour force had started to diminish before the recession years. The only group whose employment has clearly increased after the recession is that of the highly educated, whose share of the employed wage earners was 23.1 per cent in 1997 (Table 12.2). For the first time in Finland, the number and share of employed wage-earners with mere comprehensive school education is lower than that of people with university/ polytechnic education. (See Suikkanen et al. 2002, pp. 89–91.) The significant change that has occurred in the qualification of the employed is a phenomenon peculiar to the 1990s. Also, the proportion of persons in
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Finland who were engaged in year-round employment declined for all levels of education, and this decrease was more drastic the lower the educational level in question. The proportion of persons in year-round salaried employment in the 1990s was at its lowest (58 per cent) for members of the labour force (excluding entrepreneurs) who lacked a qualification beyond comprehensive school and just less than 60 per cent for those who had completed a lower secondary qualification. In 1998, it was only those with a university degree for whom the proportion in year-round employment reached the pre-recession level (Table 12.3). Those persons with an upper secondary qualification have also fared better than average on the labour market. Table 12.3 The proportion of the Finnish labour force (excluding entrepreneurs) in normal employment by level of education in the years 1990, 1993, 1995 and 1998 Year
Comprehensive
Lower secondary
Upper secondary
Polytechnic/ University
Total
1990 1993 1995 1998
78.5 60.6 58.2 61.9
76.1 60.2 59.8 65.9
78.0 67.4 65.8 69.4
74.3 67.9 65.6 74.5
77.0 63.1 61.7 67.5
This differentiation is a structural change in the labour market, including changes that have occurred in production and service organizations. These encompass a shift in how labour is used, the adoption of new technology, as well as more flexible production, all of which offer employers alternatives when determining the relation between labour and production. The issue at hand is the increased importance of unstable employment, in which a previously clear line of demarcation between participation in employment and unemployment has become blurred. What had been an abnormality of working life – fluctuating statuses in the labour market and breaks in one’s work career – have now become the norm for an increasingly large number of workers, with its attendant risks and opportunities. Unstable employment in Finland, as in other EU countries, has increased individuals’ experiences of unemployment (European Commission 1997; Koistinen and Sengenberger 2002; Tregaskis 1997). For example, despite the improved economic growth in Finland since the mid-1990s, fewer and fewer people succeed in entering working life without an intervening period of unemployment as compared to the beginning of that decade. The annual incidence of unemployment, which we use here in contrast to the annual unemployment rate, describes how large a proportion of the labour force has been unemployed
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one or more times in the course of a given year. This indicator is thus calculated on a different basis than the official unemployment rate and provides a rather more comprehensive picture of the impact of unemployment. Table 12.4 shows an application of the measure by level of education. Table 12.4 The incidence of unemployment in the Finnish labour force by level of education in the years 1990, 1993, 1995 and 1998 Year
Comprehensive
Lower secondary
Upper secondary
Polytechnic/ University
Total
1990 1993 1995 1998
10.9 30.7 31.8 29.0
12.0 30.8 29.3 25.5
6.7 23.6 22.5 17.5
3.3 14.6 14.9 11.0
9.4 26.8 26.1 21.7
Table 12.4 indicates that, as a phenomenon, unemployment has become more widespread and that its correlation with the level of education has become more pronounced. In particular, persons with relatively little education are likely to have work careers punctuated by periods of unemployment. In 1998, one-fourth of those with a lower secondary qualification and nearly one-third of those with no more than a comprehensive school education were unemployed on one or more occasions. Having at least an upper secondary qualification helped individuals maintain their position in the labour market better than the average, reduced the risk of unemployment and provided a better basis for adapting to the demands of working life. A full 80 per cent of those in the labour force who have at least an upper secondary qualification and even a higher proportion of those who have a university degree remained totally unaffected by unemployment in 1998 (Table 12.4). The longer the period of unemployment encountered, the more clearly education can be seen to differentiate the labour force. At the beginning of the 1990s, unemployment lasting an entire year was a rarity in Finland, affecting less than one per cent of the labour force regardless of education. In 1998, one in ten of those with no more than a comprehensive school background was among the long-term unemployed. Some 5 per cent of those with a lower secondary qualification were long-term unemployed, a rate approximately the same as that in the labour force as a whole. Among persons with a university qualification, long-term unemployment was comparatively low, or some 1 to 2 per cent (Linnakangas and Suikkanen 2002, pp. 41–2). The level of education among older members of the Finnish labour force is relatively low, making age another significant determinant of re-employment and a salient factor influencing participation in the labour market. A full one-
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fourth of the Finnish labour force between the ages of 55 and 64 were unemployed one or more times in 1998 and nearly one-fifth of that age group were among the long-term unemployed (op. cit., pp. 39–40). In EU countries, the proportion of 50- to 64-year-old persons in the labour force has increased since 1995. In Finland, this situation will develop dramatically by the year 2005, when persons in this age range will constitute some one-third of the labour force (Ilmarinen 1999, p. 19). An increase in the proportion of persons over 50 in the working age population means an increase in the population groups in which employment rates are low. Retaining this segment of the population on the labour market will require investments in developing their competence, in raising the level of that competence and in updating their educational qualifications. Employers want workers who will have the most competence in the labour market in the future. The ‘hard core’ of the unemployed labour force comprises persons who lack competencies and, therefore, are of no use in the labour market. A number of changes can be seen at work simultaneously, and the coincidence of various factors has brought about cumulative effects in the participation systems. Persons past middle age who have lost their job and persons with no post-comprehensive qualification have a difficult time reentering working life and their periods of unemployment easily become prolonged. The risk of becoming unemployed is also great for young adults who enter the labour market without vocational training. Employment opportunities have not always been contingent exclusively on up-to-date knowledge and skills relevant to the production process but have hinged on basic competence as well. Today social processes on the labour market play a more prominent role than to date in affording access to the latest knowledge, in mastering knowledge and in acquiring a high level of professional skill. The significance of education in whether individuals cope in the labour market is becoming topical in a new way and any prospects for the renewal of the labour market must be sought in safeguarding individuals’ ability to function throughout their lives (see Ilmarinen 1999, pp. 183–7; OECD 1997, p. 5). In the new labour market citizenship, it is not only an individual’s participation in labour that comes to the fore but also his or her ability to return to the employed labour force; accordingly, maintenance of one’s eligibility on and opportunities to enter the labour market are also to be regarded as elements of participation. Correspondingly, exclusion comes to extend beyond unemployment to include the constraints that individuals encounter in trying to maintain their eligibility in the labour market. If society’s social system is to function properly, individuals must gain a new type of participation. The underpinnings of working life must be sought in principles different from those applicable in the 1980s when, for example, discussions of flexibility focused largely on questions of corporate efficiency and tended to overlook the significance of human capital. In the new situation
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we face today, flexibility can be viewed in two aspects: on the one hand, it entails a flexible, structured relationship between the labour market and the educational system and, on the other, flexible transitions in an individual’s life between different labour market statuses and education. The former relationship is a dynamic one in that the educational system is not at the mercy of changes in working life, doing its best to adapt to them, but, rather, each must reflect and respond to changes in the other. Moreover, the change in the relationship between working life and education cannot be reflected in an individual’s life solely as increased demands that he or she change and become more flexible; labour policy, the labour market and the educational system must all come up with new alternatives and opportunities.
12.4
THE NEED FOR ALTERNATIVE OPPORTUNITIES
The interaction of working life and education entails not only a responsiveness on the part of education to the demands of the labour market but also, to a comparable extent, changes in the structures of the labour market that will support lifelong learning. From the individual’s point of view, these two amount to essentially a single consideration, that is, the extent to which an individual can construct the reality of his or her social participation and make decisions on alternative opportunities. More and more people face changes in their labour market status and the threat of losing their job during their work careers, but increasingly few – in particular adults – find it effective to educate themselves and enhance their competence in similar ways. What is essential is not so much inclusion, where work seems to be an indispensable source of participation, but the degree of social inclusion and the latitude available to people (see Gray 2000; Lister 2000; Taylor-Gooby 2000); that is, the extent to which structures are changed to create the conditions for a new type of participation in society by individuals. If we are to make lifelong learning a credible alternative, we will have to be able to compromise on the norm of full-time employment in social policy. The significance of the educational system as an avenue of participation will grow alongside participation in employment. It is important to shift the focus of education from education for young people towards education for adults and, at the same time, create educational pathways and qualifications that are as open as possible. In the future, even offering a second educational opportunity will not necessarily be enough. With the increased risks in the work career, and interruptions and instability in employment, many people will need third or even fourth chances to seek out their own path in working life and to cope amid the uncertainty and change. With individuals’ work careers characterized by a wider variety of responsi-
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bilities and workplaces than before and alternations of work and unemployment, the capacity to learn has become an increasingly essential qualification in working life. On the level of the individual, the updating of competence is a continuous process. As Martin Dyke (1997, pp. 10–15) has put it, if people are to cope in working life, they must be able to reflect on their experiences (see also Rinne and Salmi 1998, p. 178). An individual should have the ability to learn how to learn, a process he or she will need throughout his or her life. The ideal envisioned is the citizen who can acquire knowledge and skills whenever his or her changing roles and responsibilities so require. The increased fluctuations in the labour market will make labour market citizenship even more strongly contingent. It becomes a basic issue of the controllability of societies whether the logic of fluctuating labour market situations can be shaped and individuals’ participation can be supported in the transitions that occur in their work careers by creating alternatives for renewal while they are at working age.
12.5
THE COMPETENCE MARKET VS THE INDIVIDUAL PERSPECTIVE
Significant questions concerning the relation between education and the labour market are how the opportunities offered by the growth in scientific knowledge can be exploited as well as how the knowledge accumulating among individuals, businesses and different collective actors can be made available to different actors. These questions can increasingly be seen in terms of how different nations succeed in competition and are able to maintain a high level of economic growth. The more vigorously the industrial countries focus on knowledgeintensive growth, the more important broad-based learning becomes for competitiveness. But the problem that arises is whether and to what extent values and humanist perspectives are eclipsed by considerations of financial performance and competitiveness (see Cowen 1996, p. 162; Silvennoinen and Tulkki 1998, pp. 9–10). Investments in competence should not be justified solely in terms of employment and economic activity, nor can the bulk of the demands for flexibility be imposed on individuals. The essential aspect of the competence society in practice is the perspective of the individual and, with it, the question of the opportunities individuals have to enhance their competence capital throughout their work career. In other words, for whom and by what means is the competence society being built? The justification for the competence society lies in the reorganization of societal and economic activities and not in the conditions imposed by the economy on citizens’ lives. Some scholars have opted to refer to a society with faith in
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education and networks of learning in preference to learning markets (see Edwards 1997, p. 184; Heiskanen 1999, p. 118). The EU has established a focus on issues of the competence society. The Commission of the European Communities (2000, pp. 5–6) speaks of creating the social foundation for learning and for a competence society in which the goals of learning derive from both the promotion of employment and active citizenship. In practice, however, on the level of social policy the weight of these matters will rise slowly and require particular attention for a long time to come. How can we secure for both individuals and communities the resources and opportunities for flexibility and adaptation without excessively restricting the freedom and independent decision-making which actors presently enjoy? A central consideration here is the provision of increasingly concrete realizations of lifelong and lifewide learning. If society is to succeed, it will be necessary to determine how lifelong learning can be realized as a continuous development of human resources on individuals’ own terms and with their assuming responsibility under circumstances where educational resources are tight. In our view, the fact that Finnish society survived the recession and change in the structure of production of the early 1990s can largely be attributed to active adaptation and increased flexibility on the part of individual actors, these including businesses and public organizations as well as private households and individuals. In the future, Finland will need to make decisions on the direction and structural reform of its educational policy as well as on the relation between the educational and labour market systems. Progress must be made from unit- and individual-level decisions to structural, systemic and situational ones. Questions must be presented on a number of levels from different perspectives and solutions must be sought concerning the link between the labour market and education and the reform of education. We must acknowledge the extensive significance of education and incorporate the richness and diversity of education and learning into the work of organizations, into development and into the life course of individuals. Reform principles can be found in an increasingly conscious relationship between the labour market and education as well as in the broad-based adoption and utilization of education and learning in the practices of different actors.
REFERENCES Barbalet, J.M. (1988), Citizenship: Rights, Struggle and Class Inequality, Milton Keynes: Open University Press. Beck, Ulrich (1992), Risk Society: Towards a New Modernity, London: Sage. Beck, Ulrich (1999), ‘Beyond Work Society’, Paper presented at the University of Helsinki, 10 June 1999.
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Commission of the European Communities (2000), A Memorandum on Lifelong Learning, Commission Staff Working Paper SEC(2000) 1832, 30 October 2000, Brussels, www.europa.eu.int/comm/education/life/memoen.pdf Córdova, E. (1986), ‘From Full-Time Work Employment to Atypical Employment: A Major Shift in the Evolution of Labour Relations?’, International Labour Review, 6 (125), 641–57. Cowen, R. (1996), ‘Comparative Education: Modernity and Perhaps Post-Modernity’, Comparative Education, 2 (32), 151–70. Dyke, M. (1997), ‘Reflective Learning as Reflective Education in a Risk Society: Empowerment and Control’, International Journal of Lifelong Education, 1 (16), 2–17. Edwards, Richard (1997), Changing Places? Flexibility, Lifelong Learning and a Learning Society, London: Routledge. European Commission (1997), Employment in Europe, Luxembourg: Office of Offical Publications of the European Communities. Eurostat Yearbook (2002), The Statistical Guide to Europe: Data 1990–2000, Luxembourg: Office of Official Publications of the European Communities. Gonäs, Lena (1988), ‘Structural Change – Its Consequences for the Individual and the Community’, in Structural Change and Labour Market Policy, an ALC Conference at Vår Gård, June 6–9, Theme III, Effects on Individuals and Society, Vol. II, Stockholm: The Swedish Center for Working Life (ALC), pp. 1–2. Gray, John (2000), ‘Inclusion: A Radical Critique’, in Peter Askonas and Angus Stewart (eds), Social Inclusion: Possibilities and Tensions, Basingstoke: Macmillan, pp. 19–36. Heiskanen, Tuula (1999), ‘Oppimista työn arjessa: näkökulmia oppimisyhteis kuntakeskusteluun’, in Päivi Eriksson and Marja Vehviläinen (eds), Tietoyhteiskunta seisakkeella: teknologia, strategiat ja paikalliset tulkinnat, SoPhi, Jyväskylä: Jyväskylän yliopistopaino, pp. 117–33. Ilmarinen, Juhani (1999), Ageing Workers in the European Union: Status and Promotion of Work Ability, Employability and Employment, Helsinki: Finnish Institute of Occupational Health, Ministry of Social Affairs and Health, Ministry of Labour. Koistinen, Pertti and Werner Sengenberger (eds) (2002), Labour Flexibility: A Factor of the Economic and Social Performance of Finland in the 1990s, Vammala: Tampere University Press. Koistinen, Pertti and Asko Suikkanen (1988), ‘Plant Closings and the Functioning of Local Labour Markets: Theoretical and Empirical Findings in the Socio-economic Context of Finland’, in Structural Change and Labour Market Policy, an ALC Conference at Vår Gård, June 6–9, Theme III, Effects on Individuals and Society, Vol II, Stockholm: The Swedish Center for Working Life (ALC), pp. 43–66. Linnakangas, Ritva and Asko Suikkanen (2002), Koulutus työkyvyn edistäjänä, Lapin yliopiston yhteiskuntatieteellisiä julkaisuja C 43, Rovaniemi: Lapin Yliopistopaino. Lister, Ruth (2000), ‘Strategies for Social Inclusion: Promoting Social Cohesion or Social Justice?’, in Peter Askonas and Angus Stewart (eds), Social Inclusion: Possibilities and Tensions, Basingstoke: Macmillan, pp. 37–54. Marshall, T.H. (1950), Citizenship and Social Class, Cambridge: Cambridge University Press. OECD (1997), Labour Market Policies: New Challenges: Lifelong Learning to Maintain Employability, OCDE/GD(97)162, Paris: OECD. Rinne, Risto and Eeva Salmi (1998), Oppimisen uusi järjestys: uhkien ja verkostojen maailma koulun ja elämänmittaisen opiskelun haasteena, Tampere: Vastapaino.
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Schmid, Günther (1998), Transitional Labour Market: A New European Employment Strategy, October 1998, Discussion Paper FS 1 98–206, Wissenschaftszentrum Berlin für Sozialforschung, 98–206. Silvennoinen, Heikki and Pasi Tulkki (1998), ‘Elinikäisen oppimisen olennaista etsimään’, in Heikki Silvennoinen and Pasi Tulkki (eds), Elinikäinen oppiminen, Tampere: Gaudeamus, pp. 9–24. Suikkanen, A. (1999) ‘Breaking the Linear Modernisation and Changes in Life Path’, Lifelong Learning in Europe, 4 (4), 213–21. Suikkanen, Asko, Ritva Linnakangas, Sirpa Martti and Anne Karjalainen (2002), ‘Structural Changes and Transitions in the Labour Markets of Finland in the 1990s’, in Pertti Koistinen and Werner Sengenberger (eds), Labour Flexibility: A Factor of the Economic and Social Performance of Finland in the 1990s, Vammala: Tampere University Press, pp. 85–100. Suikkanen, Asko and Leena Viinamäki (1999), ‘Life Paths and Labour Market Citizenship’, in Jens Christiansen, Pertti Koistinen and Anne Kovalainen (eds), Working Europe: Reshaping European Employment Systems, Aldershot: Ashgate, pp. 189–209. Taylor-Gooby, P. (2000), ‘Blair’s Scars’, Critical Social Policy, 3 (20), 331–48. Tregaskis, O. (1997), ‘The Non-Permanent Reality!’, Employee Relations, 6 (19), 535–54. World Employment Report (2001), Life at Work in the Transformation Economy, Geneva: ILO.
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13. Regulation and innovation: Competition law Kalle Määttä 13.1
PRELIMINARY REMARKS
Virtually all regulations that affect output, profitability and technological constraints also have implications for innovative activities. (See in general Metcalfe 1995.) On the other hand, the results of innovative activities have implications for regulatory policy, that is, new technological innovations often create challenges for the development of amendments to regulation. This is also the case with respect to competition law and policy. Competition law may be an obstacle for innovations as well as facilitate innovative activities. Sometimes new innovations, like those in the telecommunications sector, have created new challenges in the application of competition law. Competition policy and enforcement have traditionally focused on the prices charged and excess returns as indicators of social welfare. Such an approach has worked well in many smokestack industries, for example, when the question involves price-fixing between business firms in those industries. On the contrary, information technology industries differ from smokestack industries in that they are currently more dynamic than static. In practice, it seems that equilibrium is transitory, if it exists at all, in information technology industries. From this point of view, it is not surprising that competition policy and enforcement appear to have been difficult to implement, particularly in information technology industries (Sheremata 1998, p. 547). A critical question here is whether innovation-based competition (rather than price competition) should make competition authorities change the way competition legislation is applied or whether competition legislation as such should be modified. Because the topic is large, we will only concentrate on the horizontal and vertical restraints of trade (or competition restrictions), not, for instance, on the abuse of dominance or mergers. We start the analysis at the macro-policy level by taking into account only the principal, and to some extent ideal, characteristics of competition policy and legislation. We will then move 254
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closer to the micro-policy level, where the design of competition legislation and its enforcement are of special importance. (See also Määttä 1997, pp. 13–14.)
13.2
COMPETITION LEGISLATION FROM THE MACRO-POLICY POINT OF VIEW
13.2.1
Schumpeterian and Arrowian Approaches and Critique Directed Towards Them
According to Schumpeterian theory, concentrated market structures should favour technological progress chiefly for reasons of static efficiency based on economies of scale and scope. Economies of scale are realized when the firm’s average costs decline with output; firms achieve economies of scope when it is possible for one firm to produce two products more cheaply than two or more firms could separately. Large firms in concentrated markets are more likely to innovate because they are better able to finance large research projects from their own profits, and because they can more easily appropriate the returns from their innovations since there are few competitors. Consequently, strict competition policies may actually slow the rate of technological progress. (See for example OECD 1996.) The Schumpeterian approach can also be called competition pessimism. The Arrowian approach states that competition among firms favours innovation and technological development. Monopolists and oligopolists have little incentive to innovate because they already control all or most of the market. Kenneth Arrow (1962) and many others have argued that the absence of competition will actually lead to less innovation. Such competition optimism is characteristic of Finnish competition policy. According to the preparatory drafts for competition legislation, among other things competition would promote progress in product and process innovations (HE 148/1987 vp.). Both these approaches can be criticized on many grounds. For instance, the Schumpeterian approach is vulnerable to criticism because there is no certainty that monopoly will allocate resources to innovative activities; investment could be made in socially unproductive activity that may yield or maintain market power. In particular, monopoly might spend heavily on rent-seeking, that is, the services of lawyers and lobbyists to persuade government or authorities to impose entry barriers on potential rivals (Posner 1975). Another problem attributed to monopoly is a greater managerial tolerance of inefficiency. This may also include reduced pressure to be efficient through constantly improving products and processes (Gellhorn and Kovacic 1994, pp. 66–71).
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The Arrowian approach can be criticized for being too simplified. For instance, market conditions differ from case to case, that is, in some circumstances only one firm may succeed in markets because of economies of scale. Moreover, this approach does not take into account at all the issues related to the design of competition law, even though in practice ‘the devil is details’ in competition policy, too. More generally, there are other factors, such as market structure, which may critically influence the innovativeness of business firms (Määttä 2001, p. 42). Both of these approaches can be criticized because the empirical relationship between innovation and market concentration is not very firm. In other words, extensive theoretical and empirical efforts to test the above-mentioned competing views have failed to establish strong links between alternative market structures and levels of technological progress. (See in general Sutton 1998.) This is one of the reasons why neither competition pessimism nor competition optimism has been adopted in this paper. Rather, the approach can be characterized as pragmatism: problems of regulation would and should be analysed case-by-case, taking into account both pros and cons of different regulatory options (Määttä 2001, p. 40). The developments that have characterized industries in recent decades are also worth noting. Many economies underwent a transformation from largely raw material processing and manufacturing activities to the processing of information and the development, application, and transfer of new knowledge. As a consequence, diminishing return activities have become increasingly replaced by activities characterized by increasing returns (Teece and Coleman 1998, pp. 810–14). Second, network externalities theory also often supports larger firms. While increasing returns is a production-side characteristic, network effect is a demandside phenomenon associated with value to the customer (Katz and Shapiro 1985). Many products have little or no value in isolation, but generate value when combined with others (Katz and Shapiro 1994). A network exists when a product’s value to the user increases as the number of users of that product grows. Each new user derives private benefits, but also confers external benefits (network externalities) on existing users. These can be called communications networks or physical networks. Another situation in which consumer coordination is vital arises when consumers choose durable hardware, for example, when they purchase a device to play music or a new format of prerecorded music. In this context we can speak about virtual networks. One problem regarding both of the cited approaches is the desirability of innovations as such. Innovation failures are usually, and also under these approaches, regarded as innovation deficits: there is too little innovation in relation to the optimal level. However, innovation deficit is only one way of viewing innovation failures. For example, it is possible that there is too much
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innovation in relation to the optimal level. In other words, over-innovation of this kind is characterized by the fact that excess resources are allocated to innovative activities and too little to other activities. Finally, so-called innovation bias is possible: regulation may spur wrong or non-optimal innovative activities (Määttä 2001, pp. 9–10). Even though a distinction such as this should be kept in mind, we will not apply it in this presentation. In addition, the innovation process has been viewed with divided opinions in the literature. (See in general Määttä 2001, pp. 18–20.) The Schumpeterian trilogy divides the process of technological change into three stages: the invention process, the innovation process, and the diffusion stage. This model has also been labelled the traditional serial, or cascade model. However, this model has been criticized on many grounds, and this criticism has created a basis for another model, the simultaneous or recursive model of innovation. As its name suggests, this model emphasizes the simultaneous nature of the innovation process. Moreover, the role of many small but cumulatively important incremental innovations has been emphasized. 13.2.2
Price Reduction-driven Competition Policy or Innovation-driven Competition Policy?
Price reduction-driven competition policy has been dominant but innovationdriven competition policy has gained supporters in recent years. For instance, according to Jorde and Teece (1992), innovation-driven competition generally stimulates rivalry and promotes economic welfare more effectively than price competition. They advocate regulatory reform in order to encourage innovation collaboration between business firms. In contrast, Brodley (1990) states that only a few narrowly targeted reforms are sufficient. Thus, there is a distinction between opinions that advocate comprehensive reform and those that only support a fine-tuning of competition legislation. We are confronted with several problems in analysing whether radical or incremental regulatory reform is sufficient. One problem is that at first sight efficient practices look like anti-competitive ones. (See also Easterbrook 1992.) This difficulty is also emphasized by Teece and Coleman (1998), who say that if competition authorities try to determine the legitimacy of choices by firms, they must then evaluate technological choices and consumer preferences. However, these agencies cannot adequately process and understand these data. Furthermore, high-technology industries are so dynamic and complex that almost any conduct can be justified by a rationale of efficiency (Sheremata 1998, p. 547). The results of the inquiry made in Finland emphasize the difficulty of this problem: not even enterprises know for certain the impact of legislation on innovative activities (Määttä 2001, p. 37).
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A critical problem involves integrating rapid technological progress and the slow regulatory process with one another. Delays in regulation may become very problematic in fields where technological development is increasing its pace. Critics of intervention claim that markets erode monopolies more quickly and effectively than governments, particularly in high-technology markets. Moreover, the opportunities for agencies to hinder competition are far greater than their opportunities to improve competition in sectors where there is rapid innovation. Consequently, competition authorities and courts should be very cautious about intervening, say Teece and Coleman (1998).
13.3
GOALS OF COMPETITION LEGISLATION IN FINLAND
As emphasized in the literature, competition policy cannot be made rational until we are able to answer one question: ‘What are the goals of competition legislation?’ (Bork 1978, pp. 50–89). Our special interest here is, of course, the role of innovativeness under competition legislation. The goals of legislation can be analysed by studying the legal texts and the preparatory drafts of legislation. It is common today in Finnish legislation that a law begins with a provision that outlines its objectives. This is also the case with the Act on Restraints of Trade. According to §1.2 of this Act, consumer welfare and the freedom to engage in trade are of specific importance when the law is applied. It is worth noting that there is no mention of innovativeness in this provision, at least not directly. Competition legislation, however, involves other provisions, so-called efficiency defence rules, which can be regarded as requirements for taking innovativeness seriously. According to §6, point 2 of the Act on Restraints of Trade, horizontal non-price restraints are allowed if they are necessary to arrangements contributing to production or distribution efficiencies or technological or economic progress (and if the arrangements concerned mainly benefit customers or consumers). Under these circumstances, no permission from competition authorities is required. Quite similar factors are also emphasized under §19.1 of the Act: this provision allows the Finnish Competition Authority to grant special permission to implement otherwise forbidden restraints of trade. A permit may be granted for measures regulated under §4–6 of the Act (such as resale price maintenance and horizontal restraints of trade). Thus, according to the text of the law it appears that innovativeness has been considered; but to what extent has it actually been determined in the decisions of the competition authorities? This
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is a result of the legal norms being flexible in nature. Actual legislative power has been delegated to enforcement agencies. It is also important to note that preparatory drafts of competition legislation involve certain statements that denote innovativeness. (See in general HE 148/1987 vp., KM 1987:4, HE 162/1991 vp. and KM 1991:15.) On the other hand, the weight of innovativeness is not obvious among the goals that have been mentioned in these drafts. Should static efficiency be the primary objective and dynamic considerations only secondary, or vice versa, or are there other goals which take precedence over innovativeness when competition legislation is applied? These questions remain unanswered in the preparatory drafts of Finnish competition legislation. The Tinbergen rule has to be recognized in this context: a different instrument has to be chosen for every goal. It is evident that achieving certain goals sometimes comes about at the expense of others. For instance, it may sometimes be difficult to simultaneously promote both static and dynamic efficiency (Baumol and Ordover 1992). Proposing multidimensional goal structures would require a method for ranking different goals and resolving possible conflicts among them (Gellhorn and Kovacic 1994, pp. 31–6). Another problem involves the type of legislation that would best promote innovation. This problem is not minor, since disagreement exists as to whether competition or concentration would succeed best, and which form of competition legislation design should be adopted to promote innovativeness.
13.4
RELEVANT MARKETS
From the legislative point of view, a problem of regulation or interpretation is whether the Finnish practice of determining the scope of a relevant product and geographic market distorts innovative activities. The process of market definition cuts across nearly every area of competition law: restraints of trade by different firms, abuse of dominance and mergers and acquisitions (Cayseele, Sabbatini and van Meerbeck 2000). In defining the relevant product market cross-elasticities of demand - that is the effect an increase in the price of one product will have on consumer demand for a close substitute - have been taken into account. Commodities reasonably interchangeable by consumers for the same purposes constitute a relevant product market. In recent years authorities have also looked for other tests to define a product market. The analysis of supply and demand substitution possibilities and opportunities is quite complicated in regimes of rapid technological change. Analysing the market from a static perspective will almost always lead to the identification of markets that are too narrow. Because market power is often quite transitory,
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standard entry barrier analysis will often find that an innovator has power over price when its position is in fact extremely fragile. Furthermore, much of the data on which competition authorities rely are necessarily backward-looking, meaning that firms at the end of an innovation-based period of dominance are actually more likely to be subject to antitrust scrutiny than in a position to exercise market power. Not all firms in existing product markets are well positioned to compete in next-generation product markets. In summary, there are severe difficulties in defining the relevant product market in high-technology industries as well as a large risk of assuming relevant product markets to be too broad. (See also Teece and Coleman 1998, pp. 832–6). Definition of the relevant geographical market follows the same methodology as above. Some products, such as automobiles and computer software, are sold in a market that is almost global. Other products, however, move only in local markets – sometimes national, sometimes only a small locality. In practice, even though there has been a lot of discussion about globalization, it has not, of course, occurred in all markets. Brodley (1990) mentions several factors that make relevant geographical markets less than worldwide: international trade restrictions, differing national standards, local subsidies, and disadvantageous exchange rates. According to the Finnish inquiry regarding the interaction between competition law and innovations, a common proposal was that the relevant geographical markets should be defined more extensively than is the case in Finland today. If the global perspective is omitted, the growth of Finnish enterprises would not be facilitated and industrial competitiveness would erode, maintained many respondents in the inquiry (Määttä 2001, p. 52).
13.5
VULNERABILITY TO CARTELIZATION
There are at least two differing viewpoints on this problem. According to Jorde and Teece (1990), there is very little risk of cartelization in rapidly evolving high-technology industries. Thus, the benefits from permissive competition legislation can be achieved at virtually no cost. The authors believe that permissive policy should also be followed in production and marketing because the application and commercialization of research is vital to innovation. In contrast, according to Brodley (1990), innovation collaboration can create anticompetitive risks and should be subject to competition legislation. On the other hand, Brodley emphasizes that innovation collaboration will not harm competition under certain conditions: firstly, alternative suppliers of innovation should exist; secondly, downstream product markets should be effectively competitive; and finally, collaboration should be limited to a constrained fraction of innovation suppliers.
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From the above perspective, it is important to identify those markets in which conditions are propitious for the emergence of collusion, that is cartelization. The following brief analysis is based on Posner’s (2001) work. Nevertheless, certain preliminary remarks must be made before our analysis. First, no single condition is necessary or sufficient to permit us to conclude that collusion exists in the market. Moreover, the list of conditions is not exhaustive, that is, there are also other kinds of direct and indirect evidence that can be used to analyse the issue. If the market is concentrated on the selling side, it is more vulnerable to cartelization. On the other hand, one cannot claim that concentration is the only factor predisposing a market to cartelization. In particular, rapid technological progress may erode cartels as well as monopolies. If entry takes a long time, the market is vulnerable to cartelization (Demsetz 1982). At first glance, because technological progress is rapid, it may seem probable that entry would not be slow. Much depends, however, on entry barriers: the size of investment needed for the new firms and whether there are legal or corresponding entry barriers. Three kinds of innovations have been distinguished from this point of view. (OECD 1997.) Firstly, there are product innovations that require relatively small resources. Under these market conditions concerns diminish as collusion becomes more difficult. Moreover, easing the tasks of competition policy can be expected with respect to product innovations where learning is relatively unimportant. Secondly, in respect to process innovations, it also seems that the task of competition policy would become easier. This is because the increased tempo of such innovations can be expected to make collusion more difficult. Thirdly, there are innovations requiring large R&D resources where learning is important. Under these circumstances, a quickening of the innovation process could be seen to increase entry barriers and, thus, requires more attention in competition policy. The same holds for innovations where interoperability between products is important: when a new product sets a new standard, access to the market may become difficult. The less standardized or homogeneous a product is, the more difficult it will be for those selling the product to collude effectively; it will be easy to cheat by altering the quality of the product. For example, if incremental innovations are characteristic of the product market, a cartel is not such a big threat. If forms of competition other than price competition are very important, the only effect of eliminating price competition by cartel may be to channel competitive energies into other forms of competition. Thus, in markets where innovation competition is important, cartels are not as common as in markets where only price competition matters.
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Collusion is more difficult to police in a market where demand is growing over time than in one where demand is static or declining. This is an important factor, since markets related, for example, to information technology have been growing rapidly, which implies that cartelization has been more difficult than in static markets. A ‘record’ of price-fixing and related violations of competition legislation is indirect evidence that the structure of the market is favourable to collusion. Related to this point of view, it is worth mentioning that anticompetitive abuse has not been unknown in innovation collaboration.1 In summary, the cartelization of industries experiencing rapid technological change, and in particular those open to international trade, is difficult. On the other hand, we cannot assume that those practices would be rare in the absence of competition legislation.
13.6
HORIZONTAL RESTRAINTS OF TRADE
According to §6, point 1 of the Act on Restraints of Trade, horizontal price agreements fall inside the scope of the per se rule. However, two exceptions are worth noting here. Firstly, according to the de minimis rule, minor restraints of trade may be allowed. A second exception is the efficiency defence rule set in §19.1 in the Act. On the other hand, horizontal non-price restraints of trade are regulated by §6, point 2. Regulation concerning price and non-price restraints is otherwise similar, but the latter-mentioned competition restrictions are also governed by the legal efficiency defence rule. Non-price restraints of trade are permitted if they are necessary for arrangements promoting efficiency without approval granted by the competition authorities. Horizontal agreements can be highlighted by research joint ventures (RJVs). They have certain advantages. Firstly, even large firms do not have adequate resources to undertake unilateral development of some new technologies and as a result a group of them should carry on development jointly. (See in general Kamien, Muller and Zang 1992). This resource argument has sometimes also been used in Finland, when approval has been granted for horizontal agreements between competitors. Secondly, co-operative research efforts, particularly among smaller firms, make it possible to achieve the scale and scope advantages of larger firms (Symeonidis 1996). Argumentation such as this can be extended. Legislation is not consistent if it allows mergers of smaller firms, but punishes cartelization. A third advantage of RJVs is the elimination of duplication of efforts. (See for example Jorde and Teece 1990.) Furthermore, learning by interaction has been regarded as important to innovation (Schienstock 1999). This may be difficult in a world in which the interaction and co-operation
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between firms is strictly regulated by competition law. In addition, restraints such as RJVs are necessary to reduce the possibilities for opportunistic behaviour and free riding by those ventures that can undermine innovative efforts (Ordover and Willig 1985, p. 311–13; Baumol and Ordover 1992, pp. 91–5). The innovations promoted by horizontal restraints of trade may be product as well as process innovations. On the other hand, RJVs may have some drawbacks. In particular, there is a fear that firms participating in an RJV will tend to curtail competition in other phases of their interaction. (See in general Kamien, Muller and Zang 1992.) However, in a system in which permits may be granted to the horizontal agreements due to the potential for innovations, cartels are easier to identify. Thus, competition authorities can follow the market behaviour of those firms participating in the RJV. Moreover, approval granted by the competition authorities may involve conditions for co-operation, and these conditions may prevent, to some extent, undesirable collusive behaviour. In addition, permits may be granted only for a short period of time at the outset of the co-operation. Competition authorities can therefore observe whether co-operation has desirable consequences or whether its net results are negative. This has also been the practice in Finland. It is interesting to note in this context that the enterprises and their organizations which took part in the Finnish inquiry cited above quite often stated that co-operation at the horizontal level should be permitted more liberally than is presently the case. They emphasized that reform is needed to improve the preconditions for innovativeness. Co-operation failures were sometimes mentioned as well: expensive innovative activities require enterprises to have the possibility to engage in dialogue. A further requirement was that pricefixing be approved in circumstances in which cartel members do not have significant market power. Reference was made to a specific market in which a large enterprise was dominant: the possibility of SMEs allying with each other may balance the situation (Määttä 2001, p. 57). There are arguments favouring the extension of the legal efficiency defence rule to also cover price-fixing. Firstly, there is no actual difference between non-price and price restraints of trade. In other words, they have similar impacts on the market, and from this perspective are substitutes for one another. Secondly, when the world is characterized by innovation competition, rapid decisions are required. There is no time to wait for decisions by competition authorities regarding approval if success in ‘hypercompetition’ is the objective. On the other hand, competition authorities would lose control over price restraints of trade if this recommendation were accepted. It seems, however, that the legal efficiency defence rule has caused no problems in respect of the non-price horizontal restraints of trade.
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VERTICAL RESTRAINTS OF TRADE
Our discussion assumes a two-level distribution model consisting of manufacturers and retailers. Moreover, we assume that vertical restraints fall into two categories. The first consists of those measures that restrict the distribution of products, for example, resale price maintenance (RPM), through which the manufacturer specifies a minimum or maximum price at which the product can be resold to retail consumers. Another group of vertical restrictions consists of measures excluding or foreclosing firms from the market. For instance, Bork (1978) has suggested a permissive competition policy towards vertical restraints of trade. He demonstrates that manufacturers impose vertical restraints in order to encourage distributors to supply certain consumer services, like delivery, credit, repair, advertising and promotional services. The manufacturer’s interest is to derive higher profits by increasing sales, and also consumers receive net benefits from increased services. On the other hand, various anticompetitive effects of vertical restraints have been identified. These effects may include facilitation of collusion, elimination of intra-brand competition and exclusion of competitors. In practice, the rule of reason is applied to non-price vertical restraints of trade in several countries, Finland among them. On the other hand, the per se rule is applied to resale price maintenance. However, there are several reasons why a more liberal policy towards RPM may be justified. Firstly, RPM offers benefits to consumers due to increased services resulting from reduced freerider problems in distribution (Telser 1960). This is also an essential issue concerning innovations. This is critical here since RPM may serve as an incentive for the diffusion of new products. The second beneficial purpose of RPM is to protect the sign of high quality created by a retailer’s approach to doing business; in other words, RPM encourages retailers to devote resources to activities helping to certify quality (Marvel and McCafferty 1984). The role of retailers in informing customers is especially important when the product is complex and changes rapidly, such as personal computers (Mathewson and Winter 1985, pp. 11–14). This is also important in respect to the diffusion of product innovations. In addition, RPM may sometimes serve as an incentive for incremental product innovations at the distribution level. A further procompetitive goal of RPM is to facilitate entry by new firms and the introduction of new products. This argument favouring RPM is also to some extent related to promoting innovation.2
13.8
CONCLUDING REMARKS
One problem – though not a very small one – confronting us is the existence of two totally different theoretical viewpoints regarding the interaction between
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competition and innovations. According to the Schumpeterian approach we should prefer monopolies to promote innovation; the Arrowian approach states that we should advocate competition as the means for doing this. The fact that empirical studies do not support either of these approaches does not help the situation. Moreover, both approaches are deficient because they concentrate on the macro-policy level and do not take into account details of competition legislation, even though the impacts on innovations are determined at this micropolicy level. The problem therefore concerns the theoretical basis we should bring into relation to the analysis. However, certain preliminary conclusions are worth mentioning here: if technological development is rapid, horizontal collusion by enterprises is not such a great threat as it is in so-called smokestack industry. This argumentation can be extended, at least to some extent, to also govern vertical restraints of trade. This is because the latter-mentioned competition restrictions have been criticized for facilitating cartels either at the manufacturing or distribution level. Horizontal collusion can be justified by the resource argument, as has also been the case in Finnish practice. On the other hand, we should also be aware that it is totally possible that even though the resource argument advocates the application of the efficiency defence rule, enterprises may also have an incentive to engage in undesirable co-operation. The legal efficiency defence rule may also be extended to govern horizontal price restraints as well as horizontal nonprice restraints. Vertical restraints of trade are commonly acceptable in regard to the introduction of new products and regarding the diffusion of product innovations. This statement concerns resale price maintenance as well as vertical non-price restraints. Relevant markets cannot be determined in an economy characterized by innovation competition in the same way as in an economy characterized by price competition. Permits due to innovations should initially be granted only for a short period of time. Then, when the innovation argument has been ‘tested’, approval may be granted for longer periods. However, temporary permits should be preferred over permanent approval, because this better facilitates controlling the behaviour of colluding enterprises. Both legislative and competition authorities are often too slow in reacting to challenges in the markets characterized by innovations and hypercompetition. However, the legislator may be even slower, which means that the role of competition authorities should be emphasized and flexible legislation preferred.
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NOTES 1. Brodley (1990), 98–9, who refers to the United States. 2. In addition, the per se rule regarding RPM is an incentive to vertical integration.
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Määttä, Kalle (1997), Environmental Taxes: From an Economic Idea to a Legal Institution, Jyväskylä: Kauppakaari Oy. Määttä, Kalle (2001), Regulatory Reform and Innovations: Whether to Trust the Invisible Hand or Use the Visible One?, Sitra Reports Series 10, Helsinki: Sitra. Marvel, H.P. and S. McCafferty (1984), ‘Resale Price Maintenance and Quality Certification’, Rand Journal of Economics, 15 (3), 346–59. Mathewson, G. Frank and Ralph A. Winter (1985), Competition Policy and Vertical Exchange, Toronto: University of Toronto Press. Metcalfe, Stan (1995), ‘The Economic Foundations of Technology Policy: Equilibrium and Evolutionary Perspectives’, in Paul Stoneman (ed.), Handbook of the Economics of Innovation and Technological Change, Oxford: Blackwell, pp. 409–512. OECD (1996), Regulatory Reform and Innovation, Paris: OECD. OECD (1997), Application of Competition Policy to High Tech Markets, OCDE/GD(97) 44, Competition Policy Roundtables, Paris: OECD. Ordover, Janusz A. and Robert D. Willig (1985), ‘Antitrust for High-Technology Industries: Assessing Research Joint Ventures and Mergers’, Journal of Law and Economics, 28 (May), 311–33. Posner, Richard A. (1975), ‘The Social Costs of Monopoly and Regulation’, Journal of Political Economy, 83 (August), 807–28. Posner, Richard A. (2001), Antitrust Law, Second edition, Chicago and London: The University of Chicago Press. Schienstock, Gerd (1999), ‘Transformation and Learning: A New Perspective on National Innovation Systems’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Sitra, pp. 9–56. Sheremata, W.A. (1998), ‘“New” Issues in Competition Policy Raised by Information Technology Policies’, Antitrust Bulletin, 43 (3/4), 547–82. Sutton, John (1998), Technology and Market Structure: Theory and History, Cambridge, MA: MIT Press. Symeonidis, George (1996), ‘Innovation, Firm Size and Market Structure: Schumpeterian Hypotheses and Some New Themes, OECD Economics Department Working Paper No. 161, Paris: OECD. Teece, D.J. and M. Coleman (1998), ‘The Meaning of Monopoly: Antitrust Analysis in High-technology Industries’, Antitrust Bulletin, 43 (3/4), 801–58. Telser, L.G. (1960), ‘Why Should Manufacturers Want Fair Trade?’, Journal of Law and Economics, 3, 86–105.
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14. Finnish science and technology policy Tarmo Lemola 14.1
FROM DEEP RECESSION TO RAPID ECONOMIC GROWTH
After the favourable economic development of the 1980s, the Finnish economy was suddenly plunged into an exceptionally severe crisis in the early 1990s. The economic collapse of 1991–93 was, in terms of output and employment, more serious than had ever been witnessed by any industrial state since World War Two (Kiander and Virtanen 2002). During 1991–93 the Finnish GDP shrank by 12 per cent. Employment fell by 18 per cent and asset prices plummeted. The unemployment rate rose from 3.5 per cent in 1990 to 18.4 per cent in 1994. In many ways the economic crisis was a collective nightmare that shook the whole Finnish society. However, Finland recovered from the recession almost as quickly and surprisingly as it had plunged into it. This was largely achieved on the back of rapid growth in exports (Pajarinen et al. 1998). Traditional industries such as paper, metals and engineering, and chemicals all increased their exports, but the strongest growth has been in the industrial cluster called information and telecommunication technology (ICT). Today, this industry is by far the largest export industry and accounts for close to 30 per cent of total manufacturing exports. Its share almost tripled during the 1990s. In 1990 the share of the other major export sector, the paper industry, was some 30 per cent. Nowadays it is less than one quarter. In its exports Finland is one of the countries most specialized in telecommunications equipment. Thanks to rapid growth and development, in the latest international comparisons Finland has been ranked as one of the most competitive countries in the world (Rouvinen 2001). Finnish strengths are typically related to innovation, technology and the general functioning of society. For their part, Finnish weaknesses are related to the size and financing of the public sector, as well as to inflexibilities in the labour market. Despite the recent success, great challenges remain. Problems in unemployment are far from being solved. Fluc268
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tuations in export volume have been exceptionally large over the last two years. The success of Finnish manufacturing industry has been mostly due to ICT production, and to a much smaller extent ICT use. The rapid recovery from recession and the growth of industria1 output has been very much explained by the success of the Finnish company Nokia, which has been the main driver of the change (Ali-Yrkkö et al. 2000). In the 1990s, Nokia became one of the world’s leading companies in telecommunications. Since the mid-1990s, Nokia has contributed significantly to the economic growth of Finland, which has been one of the fastest in Europe. But there is more than just Nokia. The whole Finnish information and communication cluster has expanded rapidly. The positive development has also been explained by referring to the active science and technology policy that Finland has pursued since the late 1960s, particularly starting with the early 1980s. According to this argument, investments in R&D and education, and other policy instruments have gradually created conditions for favourable structural changes in the Finnish economy and industry, and paved the way to the growth and success of Nokia and other Finnish high-tech companies. The purpose of this chapter is not to give a comprehensive explanation for the latest economic, industrial and technological progress in Finland. The focus of the chapter is on the question, what role can government intervention in the form of science and technology policy play in economic development in a small open economy like Finland? The chapter demonstrates that in Finland science and technology policy has had an important role to play. It has from the late 1960s consistently been oriented towards upgrading the knowledge base of the country and has put great emphasis on the significance of innovation and high technology. However, companies have had a central role in the generation of innovations and commercialization of knowledge.
14.2
EVOLUTION OF FINNISH SCIENCE AND TECHNOLOGY POLICY
14.2.1
Science and Technology Policy
According to the traditional and widely used OECD definition (OECD 1963), science and technology policy means the collective measures taken by a government in order, on the one hand, to encourage the development of scientific and technical research and, on the other hand, to exploit the results of this research for general political objectives. These two aspects are complementary: policy for science (the provision of an environment fostering research
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activities), and policy through science (the exploitation of discoveries and innovations in various sectors of government) are on a par in the sense that scientific and technological factors affect political decisions and at the same time condition the development of various fields (economy, social life, defence, and so on) which are not themselves scientific or technical. Thus science policy is determined by the idea of a deliberate integration of scientific and technological activities into the fabric of political, military, economic and social decisions. In the leading or the biggest OECD countries, it was first the Second World War, and after that national security considerations and the evolution of the Cold War, which led to the emergence of science and technology policy (Freeman and Soete 1997; Salomon 1977). The cry of alarm raised by the first Sputnik launched by the Soviet Union in 1957 was especially significant to the formation of the field. First the US and soon other industrialized countries gave science and technology policy institutional recognition through new governing bodies, support mechanisms and procedures, and growth in public R&D budgets, as well as in bureaucratic staff concerned with these issues. 14.2.2
Early Years of Finnish Science and Technology Policy
It was not until the 1960s that science and technology or research and development (R&D) and their economic significance crystallized in Finland as a topic of debate and development, later than in larger and more developed OECD countries. This late start was counterbalanced by the fact that the development of science and technology policy proceeded quickly in Finland in the 1970s and particularly from the early 1980s. Economic integration into Western Europe was set as the main goal of Finnish economic and social policy as early as the early 1960s. The concept of growth policy, which by then had also gained a foothold in Finland, advanced the role of government in supporting and promoting the innovative activity of firms. The new growth policy was shaped in a spirit of corporatism as a collaborative effort involving employers, employees and the government. The key content of growth policy was the improvement of firm competitiveness. Of the factors contributing to competitiveness, price competitiveness was most important, but the question of real competitiveness gradually emerged. Five important changes occurred in these years in the institutions and organizations of Finland’s science and technology policy. Firstly, the policy doctrines (conceptual fundamentals of science and technology policy) were created. These included the definition of science and technology policy and R&D, the major arguments for the role of government in R&D and for the growth of R&D investments, and arguments and instruments for the promotion of industrial R&D. These policy doctrines were adopted from Sweden and the OECD (Luukkonen-Gronow 1975).
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When the first actual Finnish science and technology policy programmes were written in the early 1970s (Central Board of Research Councils 1972; Science Policy Council 1973) they were to a large extent translations of OECD documents. Particularly influential was the Brooks Report (OECD 1971). Its main recommendations on the role of science and technology in social and economic development, and accordingly for the development of a closer relationship between policies for science and technology and all socio-economic concerns and governmental responsibilities, found fertile soil in Finnish science and technology policy-making. This led to the implementation of new planning mechanisms and to the introduction of the first Finnish plan for increasing the financing of R&D. Secondly, a ministerial committee on science, the Science Policy Council (later the Science and Technology Policy Council), was established in 1963 as a new high-level political body for the formulation of science and technology policy guidelines, and for interministerial co-ordination of science and technology activities. The model of the council was adopted mainly from Sweden (Forskningsberedning), which had earlier adopted it from the United States. Thirdly, a significant reorganization took place in the Finnish science and technology administration when new mechanisms for the planning, coordination, and financing of university research were created. The most visible event was a reform of the Academy of Finland research councils in 1969–71 so that they might constitute a compact body better able to plan and direct R&D funds than the old system of a couple of separate research councils. The reform included the establishment of new research posts, and what was particularly important, new grants for project research. The new system was very much built on the basis of the Swedish model (Forskningsrådet). Fourthly, a very important part of the construction of Finnish science and technology policy were the measures with the aim of improving the conditions of industrial R&D. A new fund under the authority of the Bank of Finland, the Finnish National Fund for Research and Development (Sitra), was established in 1967 to support industrial R&D. In addition, the Ministry of Trade and Industry began in 1968 to support the research and product development of firms, and it also received an additional appropriation for goal-oriented technical research. A model for Sitra came again from Sweden (Riksbankens jubileumsfond), and the inspiration for industrial R&D grants and loans originated from Sweden and the OECD. Fifthly, the development of higher education in general played a significant role in the early years of science and technology policy. That paved the way for institutional and organizational changes outside the higher education system. There were three associated reasons for the central position of universities in
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the Finnish modernization process. One was a growing awareness of the importance of higher education and basic research for economic and industrial development, and accordingly, greater demand for employees with a university education. The second one was a regional dimension, in other words, political pressure to establish new universities outside the capital city of Helsinki. The third reason was the fact that the large post-war generation began to reach maturity, and enlargement of the institutions of higher education was a social and political necessity. 14.2.3
Strengthening of Technology Orientation
The early years of Finnish science and technology policy were characterized by a strong focus on the development of basic resources and instruments of research. This research orientation was gradually replaced with a technology orientation at the beginning of the 1980s. The factors behind the transition from a research orientation to a technology orientation were economic and social. The ‘oil crisis’ of the mid-1970s led also in Finland to a slow-down in the rates of economic growth and to high levels of unemployment and inflation. These were even the years of the ‘micro-electronics revolution’, which was recognized as offering new productive and other opportunities, but which, it was feared, would also exacerbate social problems in Finland. In particular, it was feared that an increase in the use of automation in industry and services would cause mass unemployment and greater social inequality. A national consensus on the necessity for technological development and its basic objectives was reached between politicians, industrialists, and trade unions leading to the formation of the National Technology Agency (Tekes) in 1983. Tekes became the key planner and executor of the new science and technology policy. The tasks formerly carried out by the Ministry of Trade and Industry (that is, R&D loans and grants, appropriations for goal-oriented technical research) were assigned to Tekes. National technology programmes, which had already proven their worth in countries such as Japan and Sweden, were developed to serve as a new and important instrument by which Tekes could control research activities. Tekes also set about creating the prerequisites for the development of international co-operation. Finland’s participation in Eureka co-operation was one of the first steps taken. This programme began in 1985, and from the very outset Finland has been one of Eureka’s most active members (The International Expert Group, 1993). Tekes also played an important role during the period when Finland was preparing for participation in the EU’s research framework programmes. EU research programmes were opened up to the Finns, and to other EFTA countries, in 1987.
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Towards a Knowledge-based Society Through a National Innovation System
The recession years of the early 1990s accelerated the adoption of new concepts and modes of operation. An important milestone in the political formulation of the science and technology policy of the 1990s was the 1990 review carried out by the Science and Technology Policy Council. The report of this authoritative body, which is led by the Prime Minister of the day, made the concept of a national innovation system (NIS) an important instrument of Finland’s science and technology policy. It was a question of a fairly direct Finnish application of the observations and conclusions made by evolutionary economists in the late 1980s. It should be pointed out that the Finnish application was developed after the publication of the pioneering book by Freeman (Freeman, 1987), but before the books by Lundvall (1992) and Nelson (1993), and the work by the OECD (1991). The following have been mentioned in policy statements and documents (Science and Technology Policy Council of Finland, 1990) as key features of the national innovation system in Finland: • A national innovation system is a whole set of factors influencing the development and utilization of new knowledge and know-how. The concept allows these factors and their development needs to be examined in aggregate. • A national research system forms an intrinsic part of a national system of innovation. Education is another important element of the innovation system. • The general atmosphere prevailing in society also has a profound influence on the production and application of new knowledge. Another characteristic feature of an efficient innovation system is close interaction and co-operation between different actors. • Internationalization influences the activities of an innovation system in many ways. But the internationalization process also emphasizes the need to improve conditions for creating innovations nationally. It is difficult to say exactly how the ideas related to the concept of a ‘national innovation system’ have been implemented and what kinds of effects this has had on the performance of the Finnish system. The concept has been of great rhetorical and symbolic value in official and semi-official science and technology policy documents. It has supported efforts to intensify national and international R&D co-operation. More concretely, the concept has given policyplanners and decision-makers arguments on the central role of R&D and education in industrial and economic development.
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In the mid-1990s, when recovery from the recession was already under way, another concept began to be integrated into the concept of the national innovation system: the knowledge-based society (Science and Technology Policy Council of Finland 1996). This concept and the thinking behind it came from the OECD Jobs Study, an extensive programme that had been launched in the early 1990s (OECD 1994, 1996 and 1998). The OECD recommendations adopted in Finland were based, on the one hand, on the observation that knowledge-intensive growth is of undeniable significance for the national economy and, on the other, on the experience that macroeconomic or labour market measures do not alone ensure adequate preconditions for knowledge-intensive growth. Above all, the promotion of knowledge-intensive growth requires various innovation policy measures relating to R&D, education, competitive conditions, laws and regulations for the protection of intellectual property, national and international co-operation networks, and technology transfer and exploitation. The new concept complemented in an appropriate way the concept of the national innovation system.
14.3
CHARACTERIZATION OF THE MAIN LINES OF FINNISH SCIENCE AND TECHNOLOGY POLICY
14.3.1
Growth of R&D Expenditure
The most significant and sustainable single aim of Finnish science and technology policy has been to increase investments in R&D in various parts of the national innovation system. By defining objectives for the growth of R&D expenditure, Finland has identified a desired course of history – a vision of progress. Science and technology policy has created the basic institutional framework where research and development have been identified as the preferred (most profitable) economic opportunity. The first R&D statistics which were published in Finland in the mid-1960s showed that in terms of R&D expenditure in relation to GDP, Finland was clearly lagging behind the average of OECD countries and was very far from Finland’s neighbour Sweden, which already at that time was one of the leading countries. This was a very important argument for paying more attention to science and technology, and it led to specific requirements designed to set the growth of R&D expenditure as a central national goal of science and technology policy. Catching up to the ‘comparable’ international level of R&D expenditure became a national project that acquired wide support not only in research communities, but in Finnish society as a whole.
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The Science Policy Council (later Science and Technology Policy Council) of Finland recommended in 1973 that Finland’s R&D expenditure should be raised from the level of 1.0 per cent in 1973 to 1.8 per cent of GDP in 1980. However, the growth achieved was more modest than had been expected. Finland’s GDP share was also at the end of the 1970s lower than the average for the OECD countries. Even though the growth in the corporate sector’s R&D expenditure was above average, the research intensity (the share of research expenditure in the value added in production) of firms did not rise throughout the 1970s. The positive development at the beginning of the 1970s had slipped into decline in all sectors by the end of the decade. The lack of success in growing R&D investments was to a large extent due to the deterioration in the economic situation worldwide in the latter half of the 1970s. In terms of R&D expenditure, the 1980s were in Finland much more positive than the previous decade. The real growth in R&D expenditure in the 1980s averaged 10 per cent annually, which was the most rapid growth rate in the OECD area. The growth was to a large extent a result of the increase in the business sector input, but the R&D input of the universities also grew in Finland in the 1980s, which was quite exceptional in international perspective. In Finland the growth of business sector R&D was aided by the growth of government subsidies (R&D grants and loans) even if the share of government financing of R&D expenditure of companies did not exceed the level of 5 per cent. As a result of rapid growth, Finland’s R&D expenditure in relation to GDP reached 2 per cent, which was almost the same as the new target defined by the Science and Technology Policy Council in 1981. The recession of the early 1990s had an impact on R&D expenditure, but this effect was surprisingly short-lived. The average real annual growth in R&D expenditure in the years 1989–1993 was about 1 per cent, whereas in the years 1983–1987 it had been about 10 per cent. The average annual growth of the R&D expenditure of firms in the years 1989–1993 was about 0.3 per cent, whereas the corresponding figure over the same period was 1 per cent for the universities. The growth rate of R&D expenditure towards the end of the 1990s climbed back to over 10 per cent. The latest activity related to the growth of national R&D investments was the government’s recommendation in 1996 to increase investments in R&D so that the GDP share of R&D expenditure would rise to 2.9 per cent by the year 1999. As a result of this decision, state funding for research was increased in the years 1997–1999 by a total of FIM 1.5 billion (250 million euros), which meant an increase of about 25 per cent in the state’s annual research appropriations from the 1997 level. The funds necessary for these additional appropriations were obtained mainly from the sale of the shares of state-owned companies. Most of these additional funds were channelled through Tekes to industrial R&D and national technology programmes. Consequently, Tekes’ loans and
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grants for corporate R&D as well as technology programmes increased significantly in 1997–1999. The second biggest part went through the Academy of Finland to universities for basic research. With private sector R&D expenditure growing even faster than that of the public sector, Finland’s R&D expenditure in relation to GDP reached the level of 3.4 per cent in 2001. The share of the corporate sector in total R&D expenditure rose from 63 per cent in 1995 to 71 per cent in 2001. Some of the corporate sector growth is explained by the increase in Tekes’ resources. In R&D intensity, Finland ranks second in the OECD countries after Sweden. According to the latest R&D statistics, the period of rapid growth in R&D expenditure has come to an end. The growth in 2000–2001 was not more than 1.5 per cent, when on the previous year the growth was as much as 10 per cent. Surprisingly, the level of financial resources of the flagship of Finnish technology policy, Tekes, has been stable over the last four years (1999–2003). 14.3.2
Support for Corporate R&D
Support for corporate R&D has been a key component in Finland’s policy to increase R&D expenditure. The backwardness in R&D investments which was for the first time demonstrated in Finland in the mid-1960s was to a large extent due to the backwardness of corporate R&D. Therefore R&D subsidies and tax credits were among the first new instruments which were implemented in Finland in the late 1960s, and since these years the R&D subsidies (grants and loans) have been the most rapidly growing single item of government R&D expenditure. Of the total funds of Tekes, the central government agency for R&D in general and technological R&D in particular, the share of industrial R&D grants and loans comprises more than half. Even if subsidies for corporate R&D have increased in Finland for three decades in absolute terms, public funding still accounts for only 5 per cent of all corporate R&D expenditure. The funding provided by the firms themselves accounts for over 80 per cent. The joint efforts of the public and private sectors have resulted in the fact that the share of corporate R&D grew from 50 per cent in 1969 to more than 70 per cent in the year 2000. In 1997 the intensity of corporate R&D in the domestic product of industry was particularly high in Sweden (4.4 per cent), followed by Finland (2.7 per cent) and Korea (2.5 per cent). Annual growth rates of corporate R&D in these three countries were among the highest in the OECD area. Corporate R&D grew faster only in Ireland, Iceland and Australia, all of which, however, started from low levels in 1991 (OECD 1998). Finland’s science and technology policy cannot be examined without considering the Nokia Corporation. At the present time Nokia is undoubtedly Finland’s best-known firm. It is one of the world’s leading mobile phone
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suppliers and it has a strong position as a supplier of mobile and fixed telecom networks, including related customer services. The increase in R&D expenditure by private enterprise in the 1990s is almost entirely attributable to the electronics industry, or in other words, the information and communication technology (ICT) cluster. In 1998, the R&D expenditure of this industry was four times higher than in 1991, and today it accounts for more than half of total industrial R&D expenditure. It has been estimated (Ali-Yrkkö and Hermans 2002) that in 2001 Nokia’s share of total R&D expenditure in Finland was close to one third, and 47 per cent of all R&D expenditure carried out by private enterprise. This implies that Nokia alone accounts for about 60 per cent of the R&D expenditure of the Finnish ICT cluster. In 1999 roughly 60 per cent of Nokia’s R&D took place in Finland. The percentage has fallen over time, as over the last few years Nokia has expanded its R&D activities more rapidly abroad than in Finland. Science and technology policy has provided Nokia with good background support. Training and research systems have furnished the company with both knowledge and trained personnel. When the first national technology programmes emphasizing information technology were launched in Finland in the early 1980s, the Nokia Corporation actively participated in the preparation and implementation of these programmes. Nokia was also involved in Finland’s first Eureka and EU projects. Nokia has been an active player in the Finnish innovation system, but Finland has not had a national champion policy for Nokia. 14.3.3
Creation of a Favourable Social Environment for Innovative Activity
Even if the path of increasing R&D investments has been bumpier than expected, the national project that was established in Finland in the late 1960s has proceeded surprisingly consistently from year to year, including the deepest years of recession at the beginning of the 1990s. Basically, the motivation to follow the path came from the more or less psychological need to catch up to a good, comparable international level. When that level had been reached, a new ambition level was defined in the mid-1990s. It is still too early to say much about the yields of the latest investments. Anyway, the decisions show that there is in Finland good will or even serious aspirations to translate the rhetoric of a knowledge-based society into reality. Growth policy has led to concrete effects (product and process innovations) (Prihti et al. 2000), but it is probable that the symbolic effects of the national project have been at least as important as the more visible ones. They have paved the way for innovativeness and structural changes. Another illustrative example of the role of science and technology policy in creating a favourable social atmosphere for innovation comes from the turn of
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the 1980s. At that time, the attempts to accelerate scientific and technological development were forced into something of a crisis, which was due to the combined effects of the weakening economic situation and the accelerating pace of technological development. The crisis was solved by deciding to take greater advantage of the opportunities afforded by new technologies and by increasing government participation in the management of this change process, in other words, by pursuing a science and technology policy. Finland’s key social actors took part in the formulation of the new policy. Broad consensus on the main thrust of the new policy was achieved, and this has greatly facilitated the implementation of concrete measures. An important institution for building and maintaining consensus has been the Science and Technology Policy Council, which has operated under the leadership of the Prime Minister. Even though the Council has meagre resources and is basically an advisory body, it still plays an important role in the formulation and promotion of basic guidelines, and in the co-ordination of the science and technology policy-related tasks handled by different ministries. In addition, it has ensured adequate continuity for science and technology policy from one government to the next. Taking care of framework conditions has been the essence of the Council’s contribution. It has provided general support for active science and technology policy across the entire economy. 14.3.4
Degree of Government Intervention
Lipsey distinguishes three major foci for science and technology policy approaches more closely related to direct government intervention (Lipsey 1998). First, framework policies provide general support for some specific activity across all of the economy. In practice they are single-instrument policies. They do not discriminate among firms, industries or technologies but, instead, are generally available to everyone who engages in the covered activity. Examples are support for R&D (which includes R&D subsidies and tax credits) and patent protection for the owners of intellectual property. Focused policies are policies designed to encourage the development of specific technologies such as nuclear power, particular industries such as software, or particular types of R&D such as pre-commercial research. They are typically not generally available, being narrowly focused on particular client groups. Blanket policies incorporate elements of both framework and focused policies. The Finnish way of supporting corporate R&D represents the framework policy approach. The subsidies are distributed on the basis of applications received from firms. The industrial or technological field of a firm’s product development project has not been a significant selection criterion (Lemola 1994). A big part of subsidies has gone to the electronics industry, but the distribution of public financing has been very similar to the distribution of the
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corporate sector’s R&D input. The demand of firms rather than anything else has focused the attention of public financiers on the electronics industry. The national technology programmes organized and funded by Tekes are an example of a more focused approach. Already in the 1970s there were some efforts to organize larger programmes based on a more intensive collaboration between Finnish firms, research institutes and universities, but it was not until the early 1980s that this became possible on a larger scale. The first programmes were focused on information technology. The model for national technology programmes came to Finland as well as to many other countries at that time from Japan. However, the Finnish application has differed significantly from the Japanese and South Korean programmes, which are often used as examples of a focused or strategic approach. There were over 70 Tekes technology programmes under way in Finland in 2000, which means that most of the programmes are minor even by Finnish standards. The programmes are not generated by a centralized strategic planning mechanism. Initiatives for new programmes come from universities, research institutes, firms, industry associations and so on, and they are dealt with informally or semi-informally in various co-operation bodies with representatives from these organizations. 14.3.5
Promotion of Networking
Increasing the connectivity of technology-producing institutions has been a central concern of science and technology policies in all industrialized countries. This requirement is fulfilled well in Finland. Co-operation and interaction between the different elements of the national innovation system are currently much more active and diverse than they were 10–15 years ago. Moreover, the co-operation has been extended from national co-operation to international co-operation. The national technology programmes have been one important catalyst for co-operation. An important new feature in these programmes has been that the earlier bilateral co-operation has been transformed into multilateral co-operation. Firms, research institutes and universities implement programmes together. Co-operation other than that associated with the programmes has also been expanded. In particular, this has concerned co-operation between universities and firms. Active involvement in EU research programmes during the 1990s has been the most significant trend toward internationalization in Finnish research. Finland’s participation in EU programmes began in 1987. Since Finland joined the Union as a full member at the beginning of 1995, participation in EU framework programmes has become an integral part of the country’s science and technology policy. Framework programmes have appeared highly successful to Finnish universities, research institutes and firms in establishing
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closer links of co-operation with their European counterparts (Luukkonen and Hälikkä 2000). The most significant change within the national science and technology policy in the 1990s has been the creation of new programmes and organizations associated with technology transfer, diffusion and commercialization. Nationwide networks of technology parks and centres of expertise have been set up in Finland. The technology parks have initiated spin-off projects and incubators. Different kinds of technology transfer companies have been established to commercialize the results generated in universities and research institutes. Public and private venture capital operations have increased, although the market in Finland is less developed than in many other European countries, not to mention in the United States. Some of these arrangements have been created at the national level, but many have come into being on the basis of local and regional initiatives, albeit with national funding. Also, in Finland there has been a growing view over the past decade that universities can and should play a larger and more direct role in assisting industry and promoting national competitiveness. Universities have been urged to seek a more direct partnership with business in the development of basic research and in the commercialization of findings of university research. At the same time, basic government financing for university research has declined, and universities have become more dependent on financing coming from external sources, from government agencies (The Academy of Finland and Tekes), private corporations and so forth. Funding from the EU is one of the significant new sources for universities.
14.4
OTHER FORMS OF GOVERNMENT INVOLVEMENT
The development of the Finnish ICT cluster, which has been the most dominant feature of technological, industrial, economic and social development in Finland, has not been a result of an intentional private or public plan. It has been very much an organic, decentralized process with several public and private actors with a great number of informal and formal linkages between them. The government has had an important role, but even this has comprised decentralized activities without focused, consistent planning or centralized coordination. In addition to activities related to science and technology, deregulation has paved the way for the positive development of the ICT cluster. For decades in Finland there has been competition in the operator market between the PTO and a great number of local operators. Before the late 1980s the competition was more potential than acute. However, all the time the potential competitive pressure functioned as a major incentive for the operators to actively develop their competencies in order to secure a good quality of
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services at a moderate price. In the late 1980s and the 1990s the dualistic, decentralized market structure significantly accelerated the liberalization of the telecommunications field in Finland: the decisive stimulus and pressure for liberalization did not come from the government, rather it mainly came from private operators. In Finland the telecommunications equipment market, has always been open to competition. Unlike in many other countries, there has not been an exclusive relationship between a monopolistic manufacturer and the PTO. Foreign manufacturers, like Siemens, ITT-Alcatel and LM Ericsson have had production facilities in Finland. Free competition has had three kinds of dynamic effects on the evolution of the Finnish telecommunications field. Firstly, highly competitive markets confront national actors with an immense challenge. Secondly, the presence of production facilities of foreign companies functioned as a channel for technology transfer and diffusion. Thirdly, with the free supply of equipment, it was advantageous for the operators to enhance the independence of suppliers. To be able to match a variety of incompatible equipment, the operators had a strong need to develop their technical know-how (Paija 2000). The structure of the operator market along with the free supply of equipment created favourable conditions for a continuous development of technical competencies. Consequently the Finnish operators played a crucial role as demanding customers of equipment suppliers, and not least of Nokia and other emerging Finnish companies. The PTO was of great help when in the 1980s Nokia developed the first analogue mobile exchange, and it was the PTO who decided on the Finnish participation in the Nordic co-operation in mobile network construction, which virtually paved the way of the industry to the vanguard of international mobile markets. By contrast, public technology procurement has not been playing an important role in the development of Finnish telecommunications. The strong growth in the capital market after the liberalization of these markets at the end of the 1980s has been a noteworthy contributor to the ICT cluster growth and increased versatility in Finland. The removal of the last restrictions on foreign ownership in 1993 made Finland a likelier destination for foreign direct investments. A phenomenon like Nokia would not have been possible for a small country like Finland without foreign capital investments. Prior to 1993 foreign share ownership in Finland was low, below 10 per cent. By the end of the 1990s, foreign share ownership had grown to 63 per cent. In Nokia the share of foreign ownership is more than 90 per cent.
14.5
SUMMARY
Finland’s economic development in the 1990s attracted widespread international attention, and the country’s science and innovation system, including
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science and technology policy, has been described as highly efficient. Causes for attention have been Finland’s rapid recovery from a deep economic recession in the early 1990s, an exceptionally fast expansion of the information and communication industries, extensive investments in R&D by private and public sectors, and the appearance of the Finnish company Nokia as one of the world’s leading companies in telecommunications. Nokia has been playing a central role in the latest economic and technological development in Finland. Its role has been even bigger than many in Finland are willing to admit. However, Nokia is not a lone star, and its success is not an accident. The positive development of the Finnish ICT cluster, or a significant part of it, can be explained by the science and technology policy that Finland has consistently pursued since the late 1960s. Active, targeted promotion of science and technology started in Finland later than in large and more developed OECD countries. This late start has been counterbalanced by the fact that the development of science and technology policy proceeded quickly in Finland in the 1970s and particularly from the early 1980s. Investments in R&D in companies, universities and research institutes, public and private investments in education, promotion of national and international networking of R&D, and other policy instruments have gradually created conditions for favourable structural changes in the Finnish economy and industry, and paved the way for the expansion of the ICT cluster. Nokia was the company that had the best qualifications to make use of the advantages. However, the real test of the performance and efficiency of the Finnish innovation system is still ahead. To prove its efficiency Finland has to maintain its competitiveness in telecommunications in a tightening global race, and to increase the number of growing and successful ICT companies. It has to improve the competitiveness of the traditional fields of industry (paper and engineering industries), which are still very important to the Finnish economy and social welfare, and in particular, it has to be able to significantly lower unemployment from the current rate of 10 per cent. In addition to this, it has to ensure that the returns on the additional public and private investments in R&D that were made in the late 1990s are worthwhile. If Finland is able to meet these challenges successfully, then we are justified in saying that the Finnish innovation system is highly efficient. Finland’s development strategy in science and technology policy has been based on catching up with the high international level or with the models of countries and international organizations which, from the Finnish perspective, have been considered legitimate and successful (Lemola 2002). To a large extent, that target has now been achieved, which means that there are fewer models than earlier to be selected and initiated from. Instead of exploitation, the new Finnish science and technology policy should be built more on exploration. This sets new requirements for the knowledge base and instruments of policy-making.
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REFERENCES Ali-Yrkkö, Jyrki and Raine Hermans (2002), Nokia in the Finnish Innovation System, The Research Institute of the Finnish Economy, Discussion Paper No. 811, Helsinki: ETLA. Central Board of Research Councils (1972), Programme of Science Policy, Helsinki: Government Printing Centre. Freeman, Christopher (1987), Technology Policy and Economic Performance: Lessons from Japan, London: Pinter Publishers. Freeman, Christopher and Luc Soete (1997), The Economics of Industrial Innovation, London: Pinter Publishers. International Expert Group (1993), The Evaluation of the Industrial and Economic Effects of Eureka, Brussels: Eureka Secretariat. Kiander, Jaakko and Sari Virtanen (2002), 1990s Economic Crisis: The Research Programme on the Economic Crisis of the 1990s in Finland: Final Report, Helsinki: Government Institute for Economic Research, VATT Publications 27:7. Lemola, Tarmo (1994), ‘Characteristics of Technology Policy in Finland’, in Synnöve Vuori and Pentti Vuorinen (eds), Explaining Technical Change in a Small Country – The Finnish National Innovation System, Heidelberg: Physica-Verlag. Lemola, Tarmo (2002), ‘Convergence of National Science and Technology Policies: the Case of Finland’, Research Policy, 31, 1481–90. Lipsey, Richard (1998), Technology Policies in Neo-classical and Structuralist-evolutionary Models, STI Review, No. 22, Paris: OECD. Lundvall, Bengt-Åke (ed.) (1992), National Systems of Innovation, London: Pinter Publishers. Luukkonen-Gronow, Terttu (1975), ‘Suomen tiedepolitiikan kansainväliset esikuvat’ (International models of Finnish science policy), in Kettil Bruun, Katariina Eskola and Matti Viikari (eds), Tiedepolitiikka ja tutkijan vastuu, Helsinki: Tammi. Luukkonen, Terttu and Sasu Hälikkä (2000), Knowledge Creation and Knowledge Diffusion Networks – Impacts in Finland of the EU’s Fourth Framework Programme for Research and Development, Publications of the Finnish Secretariat for EU R&D 1/2000, Helsinki: Tekes. Nelson, Richard (ed.) (1993), National Innovation Systems, New York: Oxford University Press. OECD (1963), Science and the Policies of Governments – the Implications of Science and Technology for National and International Affairs, Paris: OECD. OECD (1971), Science, Growth and Society: A New Perspective, Paris: OECD. OECD (1991), TEP – The Technology Economy Programme: Technology in a Changing World, Paris: OECD. OECD (1994), The OECD Jobs Study: Facts, Analysis, Strategies, Paris: OECD. OECD (1996), Science, Technology and Industry Outlook 1996, Paris: OECD. OECD (1998), Technology, Productivity and Job Creation: Best Policy Practices, Paris: OECD. Paija, Laura (2000), ICT Cluster – The Engine of Knowledge-driven Growth in Finland, Helsinki: ETLA. Pajarinen, Mika, Petri Rouvinen and Pekka Ylä-Anttila (1998), Small Country Strategies in Global Competition: Benchmarking the Finnish Case, Helsinki: Taloustieto Oy. Prihti, Aatto, Luke Georghiu, Elisabeth Helander, Jyrki Juusela, Frieder Meyr-Kramer, Bertil Roslin, Tuire Santamäki-Vuori and Mirja Gröhn (2000), Assessment of the Additional Appropriation for Research, Sitra Report Series 2, Helsinki: Sitra.
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Rouvinen, P (2001), Finland on Top of the Competitiveness Game? The Finnish Economy and Society, 4/2001, Helsinki: ETLA. Salomon, Jean-Jacques (1977), ‘Science Policy Studies and the Development of Science Policy’, in Ina Spiegel-Rösing and Derek de Solla Price (eds), Science, Technology and Society: A Cross-Disciplinary Perspective, Beverly Hills, CA: Sage. Science Policy Council (1973), The Outlines of Finnish Science Policy in the 1970s, Helsinki: Government Printing Centre. Science and Technology Policy Council of Finland (1990), Guidelines for Science and Technology Policy in the 1990s, Helsinki: Government Printing Centre. Science and Technology Policy Council of Finland (1996), Finland: A Knowledgebased Society, Helsinki: Edita.
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PART IV
The national level
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15. The Finnish model of the knowledge economy Gerd Schienstock 15.1
INTRODUCTION
Since Bell (1976) propagated the transformation of the industrial into a postindustrial society,1 many authors have varied the theme of a fundamental economic transformation in one way or another, characterizing the emerging new economy as an information economy, knowledge economy, science-based economy, network economy, or learning economy. But independent of how the emerging new economy is characterized and what indicators are used, Finland is almost always among the leading countries in the transformation process (Schienstock and Hämäläinen 2001). Increasingly the Nordic country is seen as a model of an information society, which differs significantly from other models such as Silicon Valley or Singapore (Castells and Himanen 2001).2 Finland is one of the few countries that have taken advantage in a straightforward way of the ‘window of opportunity’ opened up by the new knowledge paradigm associated with modern ICTs on the one hand and the network organization on the other. The country represents an exceptional case insofar as during the 1990s it went from being one of the least ICT-specialized industrialized countries to becoming the most specialized country, focusing particularly on telecommunications (Paija and Rouvinen, Chapter 3 in this volume). Finland’s economy is seen as a truly ‘new economy’, as hardly any other advanced economy has undergone such a massive transformation in such a short time-span (IMF 2001, p. 3). The fact that Finland has progressed very rapidly on its way towards the knowledge economy can be explained to a great extent by the application of a systemic transformation approach,3 meaning that the development of technology has conscientiously been embedded in a wider socioeconomic framework. That is why the development into a knowledge society can be seen as a national project (Science and Technology Policy Council of Finland 1996); it has been neither a concern purely of industry nor pushed through by policy287
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makers. Instead the transformation process has involved all social groups from the national level down to the local level. However, the special feature of the Finnish information or knowledge society model is seen in the fact that the country was able to keep its well-established welfare state relatively stable (Castells and Himanen 2001). Sweden, its close neighbour, also at the gate of the knowledge economy, has carried out much deeper cuts in the welfare state. Finland’s free high-quality public education system, generous social system with strong unemployment and retirement insurance and its universal public health care system have survived relatively unchanged so far. Of course, to be able to finance such an extensive welfare state, Finland had to accept one of the highest taxation systems in the world (OECD 2000). But based on an egalitarian culture, high taxes to support the welfare state are widely accepted by Finnish people. In the following we will first investigate Finland’s transformation process from a resource-based into a knowledge-based economy. We understand the transformation process as a result of the interaction between economic pressures, critical change events, and endogenous change processes (Schienstock, Chapter 1 in this volume). Particular emphasis will be given to institutional and organizational changes. Furthermore we will turn our attention to the changes that have taken place concerning the Finnish welfare state. At the end we will point to some problems related to the Finnish knowledge economy and we will discuss some future challenges.
15.2
FIRST STEPS TOWARDS A KNOWLEDGE ECONOMY
Of course in some way or the other all economies can be seen as knowledge economies, as work always depends on the knowledge of the employees. However, the roots of a more systematic approach to developing the knowledge economy in Finland can be traced back into the 1980s.4 After the Second World War the Finnish economy industrialized very rapidly on the back of massive investments in export-oriented heavy industries such as pulp and paper, basic metals and chemicals. Finland was actually known as a ‘forest economy’ indicating a strong dependence on an industrial cluster that developed on the basis of its main natural resources (Lilja et al. 1992). There was a national consensus on following an investment-driven growth strategy; the acquisition of foreign machinery and equipment played a key role in the technological catching-up process. However, already at the beginning of the 1980s key actors in the business sector came to the conclusion that economic development in Finland could no
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longer be based on cost efficiency but rather had to focus on knowledge intensity and technological superiority. Also, problems related to a single sector-based resource economy had been discussed, particularly under the heading of crowding out other potential growth sectors. To create a national knowledge base was seen as crucial for Finnish companies to survive in an increasingly globalizing economy. These considerations led to a rapid increase in business sector R&D expenditures throughout the 1980s (Ormala 1999). At the same time the institutional setting to support knowledge creation and innovation processes had been completed. The development of the supportive institutional setting began as early as the late 1960s, and developed rapidly during the next years. At the turn of the 1970s the main building blocks of Finland’s technology policy were established, which still exist today. These include the Finnish National Fund for Research and Development (Sitra), the Technical Research Centre (VTT), the Academy of Finland having a central role in the planning and funding of university research, a number of technologyoriented universities (Helsinki University of Technology, Tampere University of Technology and University of Oulu), the Technology Development Centre (Tekes) and the Science and Technology Policy Council of Finland5 as the highest S&T policy body (Lemola, Chapter 14 in this volume). At the end of the 1980s the Finnish economy seemed to be in rather good shape, as it was on a fairly rapid growth path and experienced full employment. It had become one of the relatively affluent Nordic welfare states (Klinge 1997). Due to its high growth of GNP per capita, Finland became widely known as the ‘Japan of the North’ in the late 1980s. The strong linkages with the economy of the Soviet Union have affected Finland’s economic development to a great extent. Finland’s trade with the Soviet Union was constantly 15–25 per cent of its total export; at the same time, Finland was the most important Western trading partner of the Soviet Union until the end of the 1960s and again in the 1980s. Also, major parts of Finnish industry, including textiles, shoes, foodstuffs, machinery and some of the forest industry products, became almost totally dependent on the trade with the Soviet Union. But these intensive trade relationships between Finland and the Soviet Union had far more influence on the Finnish economy than these figures can tell, as they had a high political weight (Tainio, Pohjola and Lilja 1997). The Finnish government, which gave high priority to national security, emphasized the need of strong economic relationships with its militarily strong neighbour at its eastern border. Therefore economic life became subordinated to foreign policy, which led to massive policy intervention in the economic system. The national economic policy can be interpreted as a chain of centrally planned ‘national projects’, aiming at economic growth through large-scale investments and supported by low interest rates. One can argue that due to strong government intervention, industrial expansion from the 1960s until the
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1980s took place behind protective and regulatory barriers (Tainio, Pohjola and Lilja 1997). The strong state influence gave way to the fact that the Finnish economy was controlled by a few big companies, which hardly competed internally. For these large companies, the strong orientation towards the Soviet economy was in general very profitable. High demand, favourable prices, moderate quality standards, and long and stable planning periods created a rather stable business environment. These conditions favoured heavy investment in the companies’ technological base, but at the same time, highly inflexible organization structures and a bureaucratic organization culture developed. In addition, key positions in the top management of Finnish big corporations were mainly filled by engineers. The rapid increase in the production capacity of Finnish firms took place at the expense of productivity and efficiency, however (Lilja, Räsänen and Tainio 1992). It probably would have been difficult to sell Finnish products on the more contested Western markets, as they hardly met the high quality standards asked for. In addition, concerning productivity, flexibility and technological sophistication, Finnish manufacturing industry was clearly lagging behind the leading Western economies (Kasvio 2002). While in some successful European regions the production model of flexible specialization had emerged, in Finland mass production still dominated some key industrial sectors.
15.3
THE ECONOMIC CRISIS AT THE BEGINNING OF THE 1990s
Both internal and external reasons can be given to explain the deep economic recession of the early 1990s: excessive credit expansion related to financial market deregulation followed by a crisis of the banking system; over-expansionary macroeconomic policy in the second half of the 1980s; the collapse of trade between Finland and the former Soviet Union; and a general decline in economic development and a severe contraction in demand in Western countries. The crises had disastrous effects, as production shrunk by about 10 per cent and unemployment rose to about 20 per cent in 1994. But although the recession was very deep and painful, it also helped Finland to avoid a long-term ‘lockin’ situation. The crisis had some kind of a ‘clearing effect’ as it put aside major barriers to economic and institutional reforms. We may speak about creative destruction in the Schumpeterian sense, as the crisis forced the Finnish economy to reinvent itself. Some immediate steps had been taken to re-establish the competitiveness of Finnish industry, such as the devaluation of the Finnish currency, which
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improved the price competitiveness of Finnish products significantly. In addition, the government was forced to keep budget discipline, as it needed large amounts of public resources to rescue the nearly bankrupt Finnish banking system. Furthermore, the fact that two-year collective agreements on very modest wage increases were concluded in the mid-1990s guaranteed stable cost trends, which encouraged companies to increase employment. Also, EU membership has been beneficial for Finland, as it exposed the country’s economy to additional external competitive pressures. All these measures were quite helpful as the recovery of Finland’s export industry started relatively early in autumn 1992. However, even more important were long-term developments. While the crisis did not itself trigger changes, it nevertheless accelerated ongoing restructuring processes and supported the adoption of new concepts (Lemola 1999; Hämäläinen, Chapter 2 in this volume). It became quite clear that in order to cope with the problems caused by the economic crisis and in particular with high unemployment rates, Finland would need brisk growth through extensive re-industrialization programmes, including both the modernization of traditional industry as well as the development of new growth areas. This is reflected in the development of a new innovation policy based on the concept of ‘national systems of innovation’, emphasizing close interactions between universities, business firms and governmental research institutes. Furthermore, in 1996 the concept of a ‘knowledge-based society’ was introduced as a model to guide science and technology policy (Science and Technology Policy Council of Finland 1996). Particular emphasis was given to increasing the competitiveness of the infrastructure necessary for the development and application of information technology. The crisis, we can conclude, supported the rapid structural change towards more knowledge-based high-tech industries (Lemola, Chapter 14 in this volume).
15.4
RESTRUCTURING THE BUSINESS SECTOR
15.4.1
The Emerging ICT Cluster
Since the economic crisis and supported by the new innovation policy, Finland’s economic specialization has clearly been shifting towards knowledge-intensive high-tech branches, away from the previous raw material-, energy- and capitalintensive structure. The idea of a knowledge economy in Finland is closely linked with the development of information technologies and information industries. The change has been rapid: the share of electronics and electrical equipment among total exports grew from one tenth to more than 25 per cent
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in the 1990s, thus being higher than that of the paper industry, which had for decades dominated Finnish exports. Within the electronics and electrical equipment sector, telecommunications has a key position. When it comes to endogenous development processes, Nokia comes into the spotlight. This company has taken a leading role in the transformation process towards a knowledge economy in Finland, de-investing all its traditional businesses and focusing all its resources on becoming a global player in modern telecommunications. Telecommunications in this country represents a good example of an industry that has gained global competitiveness through companies’ specialization processes (OECD 2000). While specialization is an important factor in explaining the economic success of Nokia, there are also other strategic factors that have to be mentioned: high R&D intensity and technological leadership, early globalization strategies, outsourcing and intensive networking, a pronounced market orientation and a specific organizational culture (see Ali-Yrkkö and Hermans, Chapter 6 in this volume). Together with Nokia’s rise into a leading position in the world market, a dynamic telecommunications cluster emerged in Finland including other equipment producers and parts manufacturers, tele-operators, producers of new applications and providers of new services, as well as very advanced customers, for example in the banking sector (see Paija and Rouvinen, Chapter 3 in this volume). All in all, the Finnish telecommunications sector has developed into one of the most advanced markets in Europe and the whole world in terms of technology, service variety and price efficiency (Ali-Yrkkö et al. 2000). This can be demonstrated by several indicators; concerning the share of ICT investments of total investments, the relative weight of ICT companies in the total valuation of companies, or the ICT specialization of R&D activities, Finland is ahead in its development towards a knowledge economy. 15.4.2
Restructuring of the Traditional Industries
Although the telecommunications sector was growing very rapidly during the 1990s, traditional industries are still important in Finland, particularly with respect to employment figures (Palmberg, Chapter 4 in this volume). Therefore the modernization of traditional industries with the aim of improving innovativeness is crucially important. Forestry, metals, and energy have increasingly concentrated on high-quality production and have therefore become more knowledge-intensive (Lilja et al. 1992). However, there are some indications that Finnish companies in the traditional industries still have a long way to go to becoming highly productive and innovative learning organizations, characterized by extensive and advanced use of modern ICT, decentralized and flexible organizational forms and intensive further training of the workforce.
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For example, compared to the highly productive electronics industry with an almost 20 per cent productivity increase per year, the 1990s were a time of surprisingly slow progress for the older industries. Here productivity increases have remained on a relatively modest 1.6 per cent level (OECD 2000, p. 24). This indicates problems with the introduction of modern ICT and a dearth of innovations in management and organization (Alasoini, Chapter 7 in this volume). Besides Finland’s dominant role in ICT production, Finnish firms are not among the most advanced users of ICT (Jalava and Pohjola 2001).6 Furthermore, the use of ICT still seems to be dominated by traditional activities, such as information-searching, transmitting and receiving data files, and competitor analysis (Statistics Finland 1999). There is, except for the financial sector, little evidence so far that the strong position in ICT production has boosted the performance of the rest of the Finnish economy (OECD 2000). This can be seen as a major hindrance on Finland’s way towards the knowledge economy, as the informatization of work and the efficient use of modern ICT within production processes may have an even greater transformation power and can become more important for increasing economic competitiveness than being a leading producer of ICT-based products or services. It is a well-known phenomenon that the benefits of ICT applications can only be reaped if the introduction of the new technology is accompanied by complementary organizational changes and training activities. Unfortunately little information is available about organizational restructuring in Finnish firms, to complete the picture of business modernization processes. Of course, due to the smallness of most companies, Finland never had Fordist production structures in the real sense; we may speak about flexible Fordism (Boyer 1991). And there seems to be some evidence that during the 1990s Finnish companies have closed the gap with respect to the introduction of new organization forms and management practices enabled by ICT (Alasoini 1999). However, while many companies have introduced organizational innovations in order to modernize their production processes and make them more flexible, they still stick to the traditional top-down implementation, which does not encourage individual and organizational learning processes (Alasoini, Chapter 7 in this volume). Finnish employers consider staff training programmes to be of very high quality. However, further education programmes in Finnish companies do not differ significantly from those in other European countries (Ministry of Finance 1998). Furthermore, there is some evidence that although the need for further training is widely admitted by companies, the great majority of them still develop training programmes on an ad hoc basis, to react to immediate needs (Schienstock 1999). The above-mentioned weaknesses can explain why the OECD demands improvements concerning the implementation of high performance workplaces in Finnish companies (OECD 1998).
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CO-OPERATION – A STRONGHOLD OF THE FINNISH ECONOMY
The development of new innovations increasingly requires the combination of knowledge and resources from different sources as companies start specializing to be able to compete on a global scale. While in the 1980s insufficient networking, defined as co-operation between industry, universities, research institutes and government agents, has been identified as a weakness, now networking is generally seen as a stronghold of the Finnish economy. International indices show Finland at or close to the top of any list seeking to measure networking (Prihti et al. 2000). Also, co-operation between industry and universities is exceptionally intensive (Nieminen and Kaukonen 2001). The fact that Tekes increasingly demands co-operation between companies as well as between industry, research institutes and universities within the projects it finances, probably has a significant impact. The nature of co-operation has also become deeper and more strategic during the past decade. Networking firms were obviously growing faster and have been more innovative than companies that did not engage in interorganizational co-operation and networking (Confederation of Finnish Industry and Employers 2001). Of course, due to the dominant position of Nokia particularly in the telecommunications sector, co-operation sometimes takes place in a more hierarchical form. Also transindustrial co-operation between the new high-tech firms and the traditional industries seems to be rather difficult (Palmberg 2001). For example, the Finnish agro-food and forest industries have been very reluctant to co-operate with biotechnology-based new start-up firms (Schienstock and Tulkki 2001). Nowadays large companies restructure their supplier chain on a global scale, reducing their partners to a small number of globally acting system suppliers with the capacity to collaborate in joint innovation processes. A major problem concerning the firm structure in Finland is that firms in general play a minor role in the international supplier chain of non-telecommunications industries. This can become a major disadvantage concerning the learning and innovation potential of the economy. System suppliers in fact serve a strategically important role in the distribution of information and knowledge, with effects reaching far into the corporate field not only in the case of product and process technology, but also concerning work organization and management skills (Alasoini, Chapter 7 in this volume). In addition, there are only a few examples of real spin-offs from universities and start-up firms that have the growth potential of being able to take a leading position in the world market. While until the 1990s this could be blamed on the inefficient supply of venture capital, this is no longer the case. Since its
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birth in Finland in the late 1980s, the venture capital industry has been growing very rapidly. While initially the government played an important role in starting the venture capital market, nowadays much more private venture capital is available. In 2000, venture capital investors raised 550 million euros’ worth of new capital. But the venture capital market is still dominated by domestic institutions; only 15 per cent were raised from international investors. In addition to the liberalization of the capital market, the ensuing rapid increase in venture capital gave decisive impetus to the growth, diversification and internationalization of the ICT cluster (Hyytinen and Pajarinen 2002).
15.6
THE KIBS SECTOR: A WEAK PART IN THE INNOVATION SYSTEM?
Knowledge-intensive business services (KIBS) are increasingly seen as a key element in the knowledge economy, due both to the fact that they themselves are very innovative and also because they fulfil a bridging function in the process of knowledge diffusion. In international comparison, the Finnish KIBS sector does not seem to have exhausted its growth and employment potential, although with respect to employment, the country reaches values higher than the EU average. But Finland is among the few countries whose share of employment in these services has been decreasing recently. And with the exception of Internet-based and environment-based services, KIBS are less developed in Finland (OECD 1998). In general Finnish KIBS are too small to compete with the large international KIBS even in their home country. In the highly internationalized ICT sector no internationally competitive KIBS firms have emerged yet. Finland does not have any internationally significant producers of software and rapidly growing producers of contents for the new media are also missing in the country. Other parts of the KIBS sector are even less developed, although there is a great demand for these business services. The lack of marketing competencies among Finnish firms, particularly in traditional low-tech industries, has often been emphasized. Also, management competencies, organizational knowledge and design competencies seem to be rather weak among Finnish SMEs (Leiponen, Chapter 5 in this volume). KIBS firms in Finland seem to pay less attention to knowledge-sharing within the organization. Many firms neither systematically collect lessons learned nor client evaluations from the past. This means that cumulative organizational learning, which is very important in order to create increasing returns, rarely takes place. KIBS firms seem to benefit more from individual skills and com-
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petencies than from knowledge embedded in collective practices and problemsolving processes (Leiponen 2001). There is some evidence that some parts of the KIBS sector, including management and advertising companies, are not well integrated into the national innovation system; in particular co-operation with academic experts seems to be rather weak. Having a key role in the knowledge diffusion process, it becomes increasingly important to closely connect KIBS with network-facilitating policies; otherwise the tacit knowledge created in these networks may not diffuse as efficiently as would be possible. The lack of co-operation between parts of the KIBS and universities in R&D activities seems to be caused by the low application orientation of Finnish academic research in social science and business schools. One may argue that the KIBS sector is one of the weak parts of the Finnish innovation system (Leiponen, Chapter 5 in this volume).
15.7
GLOBALIZATION STRATEGIES AND FOREIGN DIRECT INVESTMENT
The limited size of the domestic market – especially when companies have chosen a narrow market niche – the need to be near customers and economies of scale are among the factors that have pressured Finnish companies to rapidly internationalize their operations. Earlier attempts by some Finnish companies, to become more internationalized were rather unsuccessful.7 In particular, increasing international merger and acquisition activities raised the outward FDI flows in the late 1990s. For example, the pulp and paper industry has developed into a highly globalized industry during recent years. Also, some SMEs in the telecommunications industry, being partners in the Nokia network, have expanded on a global scale quite rapidly (Ali-Yrkkö and Hermans, Chapter 6 in this volume). Currently Finnish companies employ as many people abroad as they do in Finland. On the other hand, Finland has attracted relatively little foreign investment. The inward FDI stock of Finland is still rather low in international comparison. Finland’s balance of direct investment has been most of the time clearly negative during recent years. Since foreign firms tend to improve competitive rivalry in local markets and bring new innovations to the economy, the comparatively low attractiveness of Finnish industry as a target for foreign direct investment particularly in R&D can be seen as a major disadvantage (Hämäläinen, Chapter 2 in this volume). But in future the situation may change gradually. A few Finnish SMEs have become world leaders in their small market niche, which increasingly attracts foreign investment. Furthermore, because of its sophisticated customers,
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indicated by the fact that Finland has a high penetration ratio for personal computers, mobile phones, and Internet connections, the Finnish market is increasingly seen as a possible test market for telecommunications and other information technology by foreign companies too. The openness of Finnish people to technological change may be explained by what has been called Finnish techno-nationalism (Myllyntaus 1991), which associates the country’s independence with international technological leadership. Also, in attracting people Finland has been rather weak. It is interesting to mention that even the top management of a globally acting company like Nokia consists mainly of Finnish people. Castells and Himanen (2001) mention several factors to explain the low attractiveness of the Nordic country for foreigners: high taxation, strict immigration laws, and a negative attitude to foreigners. There has been a positive trend in the figures and attitudes to attracting foreign knowledge workers but more efforts are needed, as the need for engineers but also for management professionals and other knowledge workers was higher than the supply during the late 1990s.
15.8
ADAPTING EDUCATION TO THE KNOWLEDGE ECONOMY
Major attempts have been made to adapt the education system to the knowledge-based economy. The number of new students that began courses in information technology and media studies more than tripled between 1987 and 1997. In 1997 the new information technology and media students made up about 8 per cent of all new students, their share having increased by almost 5 per cent in ten years. The number of new tertiary students in 1997 exceeded that of new upper secondary students almost three-fold, indicating increasing demand for higher education. Similar developments can be seen when we look at the qualifications and degrees attained at secondary- and tertiary-level institutions. The trend towards higher education is mainly due to a fundamental reform of the education system. The main element of this reform was the introduction of polytechnics to satisfy the increasing need for highly skilled, application-oriented professionals (Raivola et al. 2001). In addition, universities’ education capacity, particularly in engineering, has been increasing significantly. There is an interaction between raising educational levels and skill requirements at work. After the recession in the early 1990s only demand for highly educated people increased, while the share of low educated people had already started to diminish in the late 1980s. Due to these changes, the share of people with university/polytechnic education has for the first time superseded the share
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of employed wage-earners with mere comprehensive school education in Finland (Suikkanen and Linnakangas, Chapter 12 in this volume). This can partly be explained by the fact that 30 per cent of the employees in the electrical and electronics industries in Finland work in R&D. However, the trend towards third-level education very much supported by the polytechnic reform may also have some unintended consequences, as there is a growing lack of scholars in upper secondary schools (see Kekkonen, Chapter 11 in this volume). Companies in the low-tech industrial sector already suffer from a shortage of workers with practical traditional engineering skills. There is a risk that due to the weakening dynamics of the Finnish ICT sector, supply and demand on the labour market will become more unbalanced. This can create a problem of a growing over-educated workforce on the one hand and restricted economic growth in the low-tech sector due to a labour shortage on the other, as low-tech industries and less skill-based services still form a major part of the Finnish economy (Raivola et al. 2001). Also, the engineering orientation of the education system, which primarily associates the knowledge economy with information technology, may cause some problems in the near future. The knowledge economy is less about information technology than about the social organization of knowledge flows (Webster 1995). This means that knowledge workers can be equated not only with engineers, but also with experts in management, services, and cultural matters, to mention only a few areas. Although the Finnish engineering-oriented education system has supported the rapid development of the knowledge economy in the past (OECD 2000), an increasing demand might develop for specialists from economics and other social science disciplines, particularly if we take into account the wider social implications of the knowledge economy. So far there seems to be less awareness of this kind of new demand in the social sciences, although the Academy of Finland, Tekes and Sitra began to launch research projects in this field. Another problem of the Finnish education system is that it is based on a sequential model.8 More than half of an age group is studying up to the age of 25, before they start their work career. However, an education system based on a sequential model becomes too inflexible. As there is a growing need for continuous retraining, it is necessary to base the education system in Finland on a new model, which focuses more on enabling lifelong learning processes. The fact that a growing number of people have to accept phases of unemployment is a rather new phenomenon in Finland (Suikkanen et al. 2001), which also indicates the ineffectiveness of the sequential model. Of course such a restructuring of the education system is very difficult to realize, as it requires major institutional changes.
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UNIVERSITY REFORMS AND CONCENTRATION OF ACADEMIC RESEARCH
In academic research major changes have taken place, including the introduction of quasi-market mechanisms of finance allocation (Nieminen and Kaukonen 2001). Furthermore, the Centre of Excellence Programmes administrated by the Academy of Finland have led to the concentration of academic research in a limited number of centres. The latest programme includes 26 centres of excellence, three of them in the field of information technology and six in the field of biotechnology. And the profile of university research is changing in a more application-oriented direction. While the share of total expenditure in university research is very high in international comparison, business sector funding in particular has increased significantly. This can to some extent explain the fact that concerning the intensity of university-industry co-operation, Finland is ranked top among OECD countries (OECD 1998). Public funding for academic research has become more project-oriented and therefore more competitive. These developments, however, are in general not seen as a threat to the liberty of science (Nieminen and Kaukonen, Chapter 10 in this volume). The computer centres of Finnish universities have done highly valuable development work. For example, the world’s first graphics-based web browser was developed at the University of Helsinki in 1992. Finnish universities have also been very active in the building of the Nordic University Network, which provides all universities in the Nordic countries with highly effective data connections (CSC News 2001, pp. 8–13). Already at a rather early stage, Finnish students had free Internet connections, which may explain the fact that many young students participated in the development of a hacker culture (Castells and Himanen 2001). This culture has produced such innovations as, for example, the Linux operating system and the Internet Relay Chat (Himanen 2001; Torvalds and Diamond 2001). The Finnish science and technology community experienced a strong wave of internationalization during the 1990s; its products have become more visible in international scientific fora (Husso, Karjalainen and Pakkari 2000; Luukkonen and Hälikkä 2000). Involvement in EU research programmes in the mid-1990s was the most significant trend towards international opening, but Finland has also joined ESA, CERN and some other smaller European research organizations during the last ten years. The active participation in the programmes of these organizations would not have been possible without enhanced public and private R&D investment. One might have expected that Finland’s dynamic developing new economy would have offered a fertile ground for a large number of new start-up enter-
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prises but in fact only very few Finnish university graduates have shown active interest in starting their own new firm. The fact that in Finland a culture of entrepreneurship has only weakly developed has the consequence that often the valuable new knowledge produced in universities and research institutes has either remained unused or has been commercialized by foreign companies (Kasvio 2002). The less developed entrepreneurial culture as Reynolds et al. argue (2001) has to do with the fact that the Finnish universities have traditionally been accustomed to educating people primarily to work as civil servants, independent professionals or employees in large firms.
15.10
CORE AREAS OF FINNISH SCIENCE AND TECHNOLOGY POLICY
Increasing public and private investment in R&D has always been the most significant aim of Finnish science and technology policy (Lemola, Chapter 14 in this volume). During recent years three other core areas have emerged: the reinforcement of academic-industry linkages, supporting regional innovation networks and the development of new growth areas. 15.10.1
Against the General Trend: Increasing R&D
As a result of systemic public policy efforts combined with the structural change of Finnish industries towards more knowledge-intensive industries, the relative research input has steadily grown since the early 1980s. In contrast to the traditional growth-related policy in the 1960s and 1970s, it has been mainly domestic R&D, rather than imported technology that has fuelled the growth of the high-tech industry. While during the 1990s in most OECD countries R&D funding either stagnated or even started to decline, in Finland economic and social policy was based on a strategy of knowledge and know-how, even during the deep recession. This, for example, helped Nokia to continue research in some key technologies. As private sector R&D spending has grown even faster than public spending, the GDP share of R&D expenditure in Finland is now about 3.5 per cent, while it was only 1.5 per cent in the middle of the 1980s. Current R&D expenditures in Finland are clearly above the OECD average level, with a share of the corporate sector of about 70 per cent.9 The country also has the highest proportion of researchers in the workforce among the OECD countries (OECD 2001). Intensive investment in R&D has helped Finland to specialize in knowledge-based industries. The quality, relevance and international visibility of research have steadily improved as
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patenting figures, citation indices and other measures indicate (Husso, Karjalainen and Pakkari 2000). One of the most important ways of improving the quality of research in Finland has been to increase the share of competitive research funding. 15.10.2
Reinforcing Industry-university Linkages
Seeking to reinforce industry-university linkages, the Finnish government has introduced several institutions and programmes. The main aim of science parks is to create new linkages between industry, research institutes and universities. The first science park was established in Oulu in 1982. In 1999 the Finnish Science Park Association (FISPA) had 17 members representing 1200 companies, which employed a total of 12 000 persons. A major part of the R&D funding that is distributed through Tekes is used to support technology programmes. So far Tekes has launched more than 70 programmes, which indicates that these are not strategic programmes to steer technological development. Nevertheless they have proved to be very effective in promoting collaboration and networking between the private business sector and the research community.10 Co-operation with foreign partners, particularly from the US and Japan, has become a core aim of the national technology programmes. The fact that Tekes and the Academy of Finland increasingly coordinate their research activities and carry out joint programmes also indicates an effort towards reinforcing academic-industry links. In 1996 the Government of Finland decided to allocate over 500 million euros in proceeds from state property sales to research and development (Prihti et al. 2000). A cluster programme was one of the main new elements in the additional appropriation of research funding. Eight cluster programmes were launched under five sectoral ministries. The overall aim of the programme is to support R&D, which strengthens industrial clusters by reinforcing academicindustry links. 15.10.3
Strengthening the Regional Level
Geographical proximity is an important factor in the knowledge creation process, as it supports the development of mutual trust relations and promotes repeated interactions and the exchange of mainly tacit knowledge (Saxenian 1994). Therefore the regional level has become increasingly important in the process of developing the knowledge economy. However, only recently has the development of regional innovation capabilities become a major aim of Finnish innovation policy. Small provincial universities had already been founded in the 1960s and 1970s in order to strengthen regional innovation activities and to achieve greater regional equity. But only during the 1990s was
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the basis for a more profiled and coherent regional innovation policy established. For example, major reforms were made in Finnish regional administration in the mid-1990s, reducing the number of administrative districts significantly. This has improved their capability to develop a more profiled regional innovation policy. The nationwide networks of technology parks have been set up mainly to support regional innovation activities and local networking. In 1994 the Centres of Expertise Programme was launched as part of the new programme-based regional development strategy, which will continue to 2006 (Valtonen 1999). The aim of the Centres of Expertise Programme is to enhance the knowledge base and to prepare and launch in selected industries joint projects of firms, universities, research institutes, technology centres, and public administration. Instead of supporting weak areas, the Centres of Expertise Programme focuses on regional strengths and on enhancing and further developing them. The recent polytechnic reform (Kekkonen, Chapter 11 in this volume) also underlines the new regional orientation of Finnish innovation policy. The polytechnics are expected to take up a regional development function by educating a new type of expert who corresponds with the skill demands of the emerging knowledge economy and by offering advisory services particularly to SMEs (ibid.). And the establishment of regional Employment and Economic Development Centres (EEDCs) can be seen as an attempt to make regional policy more effective by co-ordinating technology and employment-related policy measures. Regionally oriented innovation policy has already produced some astonishing results. For example, Tampere Region has managed to turn from a place dominated by smokestack industries into an increasingly knowledgebased economy (Kautonen, Koski and Schienstock, Chapter 9 in this volume). Due to its very active participation in various programmes of the European Industrial Regions Association (EIRA), Tampere Region has been able to establish closer co-operation with a number of other European regions. The idea of developing regional innovation systems in Finland, however, poses some problems. In a small country like Finland a strong focus on regional development and networking among local companies might prevent more efficient co-operation among firms localized in different regions and even abroad (Miettinen 2002). Furthermore, regional competition stimulated through the Centres of Expertise Programme can cause the parallel establishment of highly overlapping institutional settings. One can have some doubts whether supporting a strong regionalism in a small country like Finland will always allow for the development of a critical mass for organizing knowledge creation and education in an efficient way. At the least the development of regional centres of knowledge creation and diffusion needs to be accompanied by inter-regional co-operation in Finland, which seems to be missing so far. Incentives are needed to initiate the sharing of support institutions and to stimulate transregional
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networking among support organizations such as polytechnics, universities, and research institutes. Furthermore, the division of tasks between national and regional agencies does not seem to be very clear and the co-operation between regional and national agencies seems not to function very effectively. 15.10.4
Search for New Growth Areas
As the electronics sector is growing rapidly, there is some fear that Finland will become too dependent on this sector. Major attempts have been made to identify new growth areas. The Science and Technology Policy Council of Finland has addressed the importance of services in the emerging knowledge society. So far the rapid growth of the Internet in Finland has not led to a corresponding growth in the supply of Finnish content and services. The aim is to develop Finnish content and cultural industries into an international competitive branch alongside telecommunications technologies. Finland has also been systematically investing in new biotechnology research (Schienstock and Tulkki 2001). As in other parts of Europe, Finnish biotechnology concentrates mainly on pharmaceutical industries. Anticipatory policy has focused on setting up an institutional support structure. For example, the relatively large number of centres of excellence in the field of biotechnology can be seen as a strong commitment of decision-makers to forcefully develop this high-tech area. Furthermore, it is planned that Helsinki become the site of the largest agglomeration of biotechnology firms in Europe. Similar to developments in other countries (Audretsch 2001), the regional level is important for the creation of innovation networks in Finnish biotechnology (see Bruun, Chapter 8 in this volume). So far, however, the high expectations associated with biotechnology have not been fulfilled, as there is only little production in this sector and major foreign investments have not taken place yet. Critics have demanded a more focused approach in order to guarantee a critical mass in specific research areas. 15.10.5
Vision Orientation and Discursive Co-ordination
There is general agreement in Finland that knowledge and ‘know-how’ are crucial to economic growth, employment and social welfare. The Science and Technology Policy Council has been instrumental in seeking and reaching this national consensus. The Council has played a key role in getting governments, irrespective of their general political aspirations, to commit themselves to ambitious goals in science and technology policy. Due to the important role of the Council, the Finnish S&T policy can be characterized by the following two aspects: vision orientation (knowledge society) on the one hand and
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discursive co-ordination in policy networks on the other (Schienstock and Hämäläinen 2001). Concerning consensus formation on the general outline of S&T policy, the Science and Technology Policy Council has been very successful. The consensus of opinion concerns the general goals and objectives of how to develop the different parts of the national innovation system. The development of the innovation system rests heavily on close co-operation between the public and private sectors. The fact that Finland as a small country has been able to accumulate a great amount of social capital (Schienstock and Hämäläinen 2001) may have supported the consensus-seeking trend in Finnish S&T policy. Such policy networking brings together all the relevant knowledge available and stimulates collective learning processes. A vision-oriented innovation policy has the advantage of outlining a new general development path but at the same time of being flexible enough to integrate a broad variety of different perspectives. The long-standing existence of a high-level co-ordination structure can be seen as crucial to overcoming fruitless struggling and ‘territorial thinking’ among ministries. The way in which consensus-building occurs can be characterized as discursive coordination in policy networks, as the Council includes members from all key institutions involved in innovation activities. Some problems seem to occur, however, when it comes to the coherent and concurrent transformation of the vision. The vision-oriented policy gives ministries space for different interpretations, which makes continuous monitoring of each other and interactive learning crucially important. But crosssectoral co-ordination of public policies and government activities seems to still be a problem in Finland (Bouckeart, Ormond and Peters 2000). For example, co-ordination of science and technology policy on the one hand and labour market policy on the other hardly took place in the past. However, to rely on the traditional sequential model of innovation policy, which first supports technological change and afterwards deals with the social problems that have occurred, is no longer possible as such a strategy causes social exclusion processes. Instead a more integrated policy approach is needed, which deals with technological and related economic and social problems simultaneously (Lundvall and Archibugi 2001). There is obviously not enough understanding within ministries of the need for a systemic transformation process, which demands the harmonization of programme initiatives over a broad variety of different policy areas. Another problem is that ministries work through intermediary institutions while co-ordination takes place on the level of ministries in a more bureaucratic way (Brouckaert, Ormond and Peters 2000). This is all the more astonishing as the public sector is rather well equipped with modern ICT (Ministry of Finance 2001), which could support horizontal co-operation.
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Effective problem-solving, however, depends upon direct co-operation among the involved experts. Bureaucratic structures and hierarchical co-ordination are too slow and ineffective to allow for developing optimal solutions.
15.11
CHANGES IN THE FINNISH WELFARE STATE
The specificity of the Finnish knowledge economy is that it emerged together with a welfare state of a rather high standard. Castells and Himanen (2001) actually argue that not only does the well-developed welfare state depend on strong knowledge industries but also the emerging Finnish knowledge economy could only develop to its present strength due to the integrative and inclusive effects of the welfare state. Until the beginning of the 1990s welfare policy in Finland was rather successful in achieving its main goals: keeping unemployment rates low, narrowing down income differentials, and expanding social services. This is based on a fairly egalitarian culture, which worked against social differentiation and segmentation. Finland, as a small country in which intensive co-operation and collective mobilization of resources is widespread, provides a good example of a relatively homogeneous ‘high-trust’ culture. The high unemployment rate caused by the crisis at the beginning of the 1990s has become a great challenge to the Finnish welfare state. While the economy started to recover very quickly from recession and reached the prerecession growth rate as early as 1996, unemployment – despite starting to decrease steadily from 1994 onwards – still remains rather high. Although by 1999 Finland’s unemployment rate of about 10 per cent was around the EU average, it is still about double the average of the best performing countries in the OECD and has not come even close to the pre-recession level. Also, the number of social assistance recipients increased quite significantly in the years after the recession. Looking at the annual incidence of unemployment, one can get a more comprehensive picture. This figure increased significantly in Finland during the 1990s. While before the economic crisis (1990) only about 10 per cent of the workforce experienced unemployment, this share is now above 20 per cent, having dropped only slightly from its peak in 1993, which indicates an increasing instability in work careers. Persons with little education are more likely to experience unemployment than highly educated people. In 1998 about 30 per cent of those workers with no more than comprehensive school education were unemployed on one or more occasions. As in many cases older people have rather little education, age is also closely correlated with experiencing unemployment (Suikkanen and Linnakangas, Chapter 12 in this volume). Youth unemployment in Finland is rather high compared with the situation in most other European countries (OECD 2000). The high unemployment rate
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particularly among low-skilled young people can become a serious problem in the near future, as the workforce in Finland shrinks very rapidly during the coming years. It might be the case that demand for highly qualified workers is growing very rapidly, while at the same time the unemployment rate remains high due to the increasing skills gap. Not only the high unemployment rate but also the structuring of unemployment is becoming worrisome, as long-term unemployment and repeated unemployment are becoming essentially more common (Suikkanen et al. 2001). The added proportion of the long-term and chronically unemployed in 1998 was above 60 per cent of the annual flow of the unemployed, which was significantly higher (41 per cent) than in 1990 before the economic crisis (Lehtonen et al. 2002). As the demand for low-skilled labour is structurally low in Finland as an increasingly knowledge-based economy, this group of workers often in combination with high age is at risk for being pushed to the periphery of the labour market with highly insecure jobs or becoming long-term unemployed and socially excluded. While the unemployment rate in Finland came down during the 1990s, the share of people in normal employment only increased slightly during that period. During the 1990s jobs in low-pay sectors became increasingly dominated by atypical work contracts. In Finland over half of all new job contracts signed can be characterized as atypical (Lipponen 2000). Atypical employment, we can conclude, cannot be seen as a phenomenon of the economic crisis; it has become more and more common since the 1990s. Relatively small income differences have been seen as another characteristic of the Finnish welfare system (Förster 2000). Up to the 1980s Finland belonged to the most homogeneous of the advanced industrialized countries and even the crisis at the beginning of the 1990s did not cause income differentials to increase significantly (Lehtonen et al 2002). But the period of high economic growth changed the income situation dramatically; the fruits of economic growth in the second half of the 1990s have been distributed increasingly unequally. This can, on the one hand, be explained by the fact that due to increasing global cost and price competition wage increases in the second half of the 1990s in Finland were rather moderate. Also, the Finnish investment-driven growth strategy has kept wages from rising more strongly (Sauramo 1999). On the other hand, the incomes of higher-level management and particularly profit-related incomes increased dramatically during the late 1990s due to the worldwide spreading of Anglo-Saxon management philosophies and principles. Because of the boom at the Finnish Stock Exchange property-related incomes have also been growing quite significantly. These developments have caused increasing income gaps between a relatively small group of rich households and a larger group of poorer households, but relatively the middle-income
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brackets have lost the most. The new developments have also caused increasing regional differences; while growth areas such as Helsinki and Tampere have achieved significant gains, in most rural areas and some old industrialized regions the economic situation has hardly improved. And there still exists a divide between the highly industrialized triangle in the Southwest between Helsinki, Tampere and Turku and the northern and the eastern parts of Finland. The extremely high unemployment rate at the beginning of the 1990s resulted in rapidly growing social security expenditures; total social security expenditures increased from 25 per cent to 35 per cent of GDP at the beginning of the 1990s. Although these costs declined from that peak they still remained at a comparatively high level after the economic recovery. The relative decrease in social and unemployment costs is partly related to the decreasing number of benefit recipients but was mainly caused by cuts in benefits and the growth in the relative proportion of minimum benefit recipients (Lehtonen et al. 2002). Of course the limitation on public debts in the EU put additional pressures on the Finnish government to keep social security expenditures within limits. Summing up, we can argue that welfare policy in Finland did not manage to achieve the high standards of the pre-recession level in the late 1990s and at the beginning of the new century. The unemployment rate is still comparatively high with a growing part of long-term and chronically unemployed, income differentials between wage and property revenues have increased dramatically and expenditures for social services have been cut back significantly (Lehtonen et al. 2002).
15.12
CONCLUSION
According to many experts, Finland is one of the leading countries in entering the knowledge economy. While there is plenty of evidence for this judgement, we will here sum up some critical remarks. Assessments are often based on a primarily technology-oriented approach, which on the one hand refers to the increasing importance of the ICT sector, and on the other hand to the intensive use of modern ICT by consumers. Although the ICT sector in Finland has been growing very rapidly, the traditional economy is still very important, particularly concerning employment. And there are signs of a limited growth perspective for the ICT sector in the time ahead. Furthermore, during the 1990s Finland focused very much upon the production of modern ICT, while concerning its use in production processes Finnish companies are less advanced. A full transformation process, however, cannot be limited to one sector only, but has to include the whole economy. In future, economic growth has to come from the modernization of traditional industries and the integration of the old and the new economy, as it is less likely to come from the troubled ICT sector.
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Looking at the ICT cluster more closely, we can also identify some weak points. First of all, we have to take into account the fact that the Finnish ICT sector is highly dominated by one globally acting firm and is therefore very sensitive to the faith in this single global player and its local and global network. Furthermore, the Finnish ICT cluster focuses on equipment production to a great extent; however, together with the development of the next generation of mobile phones, it is the service producers and content providers that will lead the development of the sector. Sonera’s11 attempt to develop into a technologically sophisticated service company specializing in telecommunications and data exchange with products that are international brands has not been successful, as the company was forced to merge with the Swedish company Telia. In general the digital content industry in Finland is at its early stage of development and internationally hardly competitive. If we turn our attention to organizational aspects, the bright picture of the Finnish success story becomes even more stained. The lack of small and medium-sized innovative firms in the traditional industries as well as of a strong KIBS sector can become a major problem in the transformation process towards a knowledge-based economy. Dynamic medium-sized companies as well as KIBS represent a crucial part of a networked knowledge economy. The first group of companies is needed as an information link between major international corporations and small parts-producing supplier companies (Alasoini, Chapter 7 in this volume), while the second group can take up a bridging function between different industrial sectors (Leiponen, Chapter 5 in this volume). In addition, we have to take into account that productivity gains and increased innovativeness can only be realized if the introduction of modern ICT is accomplished by complementary organizational innovations and training activities. Although there are some signs that internal and external network structures are increasingly applied in the Finnish economy, companies in this country, with the exception of those belonging to the ICT cluster, are not among the pioneers in the techno-organizational modernization process. The productivity and learning potential of high performance workplaces has not been exploited by a significant number of Finnish companies. There are also some bottlenecks concerning the co-operation between the traditional economy and the high-tech sector. This is the more problematic as companies’ capability to innovate in the old economy to a great extent depends upon knowledge transfer from the high-tech sector. The techno-organizational conservatism is partly due to the fact that while in general the Finnish workforce is well educated, there are great differences between the highly skilled younger generation and the less educated older generations. To secure good productivity growth through modernization processes in the traditional industries is also very important, because the labour supply in Finland will begin to fall rapidly as the population ages. To compensate for the
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problems arising from labour shortages, rapid growth in productivity is needed to avoid a slowdown in growth (Alasoini, Chapter 7 in this volume). All these findings indicate that in some fields Finland has some way to go to become a real knowledge economy. As the traditional economy is lagging behind, one might argue that Finland is moving towards a dual economy in which the different sectors are functioning according to an entirely different logic (Castells and Himanen 2001). But we also have to be aware of the fact that the troubled ICT sector is losing its dynamics and may become more like traditional industries with much less dynamic growth. Concerning the Finnish welfare state, some people argue that we are witnessing a system change from the social democratic towards a more liberal or conservative model. There is no doubt that during recent years we have seen some changes concerning the aims and some cuts concerning the services and payments (Lehtonen et al. 2002). On the other hand, the example of Finland can also demonstrate that those scenarios that anticipate the end of the welfare state are quite exaggerated. Changes that have taken place in the Finnish welfare state do not seem to signify a logical transition towards another welfare model. Even before the recession the Finnish welfare state model was a mixed model and the current cuts go in different directions. Still we cannot deny that together with the latest economic developments, the Finnish welfare state has been shrinking. Although the welfare state is highly accepted in Finland, in the current economic situation there seems to be little economic scope to keep or even improve the current level of the welfare state, particularly as – because of the already very high taxation – further tax increases to finance the welfare state are very unlikely and may have a negative impact on economic growth. Finnish science and technology policy has been successful in catching up with the models of the most advanced countries. This means that Finland needs to explore new roads of technological change (Lemola, Chapter 14 in this volume). One important aspect of a new perspective on scientific and technological development is the need for an integrated approach. Policies of various ministries have to be co-ordinated more intensively; in particular labour market and social policy should not be uncoupled from those policy areas that have the support of techno-economic development and economic growth and competitiveness as their main task. Although the creation of policy networks in Finland is rather widespread, such an integrative policy approach seems to be lacking so far.
NOTES 1. In the following I will talk about changes only in the economy. 2. Here I prefer to use the term ‘knowledge economy’, as there is less association with any kind of technological determinism. Also, in the Finnish debate the term ‘knowledge economy’ or ‘knowledge society’ has more or less replaced the term ‘information society’.
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3. Finland was the first OECD country to apply the national systems of innovation approach as a basis for policy-making (Ormala 1999). 4. Of course, the exceptional structure of the Finnish telephony markets, established in the 1880s, can be seen as an important factor that had a major impact on the development of the Finnish ICT cluster. 5. It was established in 1986 to continue the work of the previous Science Policy Council but with an extended mandate. 6. This is beside the fact that Finnish unions in general have a very positive view on technological development and they have responded positively to the spread of modern ICT in workplaces. 7. Nokia’s previous efforts to conquer a significant share of the European consumer electronics markets failed; the company was close to bankruptcy. 8. The sequential model distinguishes between three phases: education, work and retirement. 9. I have to mention, however, that a major share of the R&D expenditures of the most R&Dintensive electronic industry comes from Nokia. 10. In 1999 Tekes allocated some FIM 1.1 billion (about 200 million euros) to technology programmes. The technology programmes involved about 2400 companies and some 860 research units. 11. The biggest Finnish telecommunications operator.
REFERENCES Alasoini, Tuomo (1999), ‘Organizational Innovations as a Source of Competitive Advantage – New Challenges for Finnish Companies and the National Workplace Development Infrastructure’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Hakapaino OY, pp. 205–19. Ali-Yrkkö, Jyrki, Laura Paija, Catherine Reilly, and Pekka Ylä-Anttila (2000), Nokia – A Big Company in a Small Country, B162 series, Helsinki: Taloustieto. Audretsch, D.B. (2001), ‘The Role of Small Firms in US Biotechnology Industry’, Small Business Economics, Special Issue, 1–2 (17), 3–15. Bank of Finland (2000), Economic Statistics on Finland: Direct Investment, 12-Month Moving Totals, www.bof.fi/env/rhinden.htm Bell, Daniel (1976), The Coming of Post-industrial Society: A Venture in Social Forecasting, New York: Basic Books. Bouckaert, Geert, Derry Ormond and Guy Peters (2000), A Potential Governance Agenda for Finland, Helsinki: Ministry of Finance. Boyer (1991), ‘New Directions in Management Practices and Work Organization: General Principles and National Trajectories’, Revised draft of a paper presented at the OECD Conference on Technological Change as a Social Process, Helsinki, 11–13 December 1998. Castells, Manuel and Pekka Himanen (2001), The Finnish Model of the Information Society, Sitra Reports Series 17, Vantaa: Kirjapaino Oy. Confederation of Finnish Industry and Employers (2001), Kohti strategisia yritysverkostoja, Helsinki: Confederation of Finnish Industry and Employers. CSC News (2001), ‘CSC 30 Years – Some Personal Notes and Memories’, CSC News, 4 (13), 8–11. European Commission (1997), Green Paper Partnership for a New Organization of Work, Document drawn up on the basis of COM (97) 128 final, Brussels and Luxembourg.
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Förster, M.F. (2000), ‘Trends and Driving Factors in Income Distribution and Poverty in the OECD Area, Labour Market and Social Policy’, Occasional Papers, No. 42, Paris: OECD. Himanen, Pekka (2001), The Hacker Ethic and the Spirit of the Information Age, New York: Random House. Husso, Kai, Sakari Karjalainen and Tapio Parkkari (eds) (2000), ‘The State and Quality of Scientific Research in Finland: A Review of the Scientific Research in the Late 1990s’, Publications of the Academy of Finland 7/00, Helsinki: Academy of Finland. Hyytinen, Aki and Mika Pajarinen (2002), Financing of Technology-intensive Small Businesses: Some Evidence of the Uniqueness of the ICT Industry, Working paper 813, ETLA. IMF (2001), Finland: Selected Issues. Country Report, Washington, DC: International Monetary Fund. Jalava, Jukka and Matti Pohjola (2001), ‘Economic Growth in the New Economy: Evidence from Advanced Economies’, Discussion Papers, 2001/5, Helsinki: UNU/Wider. Kasvio, Antti (2002), ‘Anti Silicon Valley? Reflection upon the Finnish Information Society “Model” and its Future Prospects’, University of Tampere, unpublished paper. Klinge, Matti (1997), A Brief History of Finland, Helsinki: Otava. Lehtonen, Heikki, Simo Aho, Jarmo Peltola and Mika Renvall (2002), ‘Did the Crisis Change the Welfare State?’, unpublished paper, Tampere. Leiponen, Aija (2000), Innovation in Services and Manufacturing: A Comparative Study of Finnish Industries, ETLA Sarja B 165 Series, Helsinki: Taloustieto Oy. Leiponen, Aija (2001), ‘Knowledge Services in the Innovation System’, Helsinki: ETLA/Sitra. Lemola, Tarmo (1999), ‘Different Perspectives on the Problems and Challenges Facing the Finnish Innovation System’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Hakapaino Oy, pp. 130–40. Lilja, Kari, Keijo Räsänen and Risto Tainio (1992), ‘A Dominant Business Recipe: The Forest Sector in Finland’, in Richard Whitley (ed.), European Business Systems: Firms and Markets in their National Contexts, London: Sage, pp. 137–54. Lipponen, Paavo (2000), ‘A Comprehensive Strategy Works: Finland’s Experience, in the 1990s’, in European Commission, Government of Finland (eds), Policies Towards Full Employment, Paris: OECD, pp. 23–5. Lundvall, Bengt-Åke and Daniele Archibugi (2001), ‘Introduction: Europe and the Learning Economy’, in Daniele Archibugi and Bengt-Åke Lundvall (eds), The Globalising Learning Economy, Oxford: Oxford University Press, pp. 1–20. Luukkonen, Terttu and Sasu Hälikkä (2000), ‘Knowledge Creation and Knowledge Diffusion Networks: Impacts in Finland of the EU’s Fourth Framework Programme for Research and Development’, Publications of the Finnish Secretariat for EU R&D 1/2000, Helsinki: Tekes. Miettinen, Reijo (2002), National Innovation System: Scientific Concept or Political Rhetoric?, Helsinki: Edita. Ministry of Finance (1998), Benchmarking Finland: An Evaluation of Finland’s Competitive Strength and Weaknesses, Helsinki: Ministry of Finance. Ministry of Finance (2001), Information Technology Within the Government 2000, Helsinki: Ministry of Finance. Myllyntaus, T. (1990), ‘The Finnish Model of Technology Transfer’, Economic Development and Cultural Change, 38 (2), 625–43.
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Nieminen, Mika and Erkki Kaukonen (2001), Universities and R&D-networking in a Knowledge-based Economy: A Glance at Finnish Developments, Sitra Reports Series 11, Helsinki: Hakapaino Oy. OECD (1998), The OECD Jobs Strategy: Technology, Productivity and Job Creation: Best Policy Practices, Paris: OECD. OECD (2000), OECD Economic Surveys: Finland, Paris: OECD. OECD (2001): ‘OECD Science, Technology and Industry Scoreboard: Towards a Knowledge-based Economy, 2001 edition, Paris: OECD. Ormala, Erkki (1999), ‘Finnish Innovation Policy in the European Perspective’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki, Hakapaino Oy, pp. 117–29. Palmberg, Christopher (2001), Sectoral Patterns of Innovation and Competence Requirements – A Closer Look at Low-tech Industries, Sitra Reports Series 8, Helsinki: Hakapaino Oy. Prihti, Aatto, Luke Georghiou, Elisabeth Helander, Jyrki Juusela, Frieder Meyer-Kramer, Bertil Roslin, Tuire Santamäki-Vuori and Mirja Gröhn (2000), Assessment of the Additional Appropriation for Research, Sitra Reports Series 2, Helsinki: Hakapaino Oy. Raivola, Reijo, Kari Kekkonen, Pasi Tulkki, and Anu Lyytinen (2001), Producing Competencies for the Learning Economy, Sitra Reports Series 9, Helsinki: Hakapaino Oy. Reynolds, Paul D., Michael S. Camp, William D. Bygrave, Erkko Autio and Michael Hay (2001), Global Entrepreneurship Monitor, 2001 Summary Report, London and Babson Park, MA: London Business School and Babson College. Sauramo, P. (1999), ‘Tulonjako työn ja pääoman välillä – missä mennään?’, Talous & Yhteiskunta, 4. Saxenian, Annelee (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge, MA: Harvard University Press. Schienstock, Gerd (1999), ‘From Direct Technology Policy Towards ConditionsEnabling Innovation Policy’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Hakapaino Oy, pp. 420–41. Schienstock, Gerd and Timo Hämäläinen (2001), Transformation of the Finnish Innovation System: A Network Approach, Sitra Reports Series 7, Helsinki: Hakapaino Oy. Schienstock, Gerd and Pasi Tulkki (2001), ‘The Fourth Pillar? An Assessment of the Situation of the Finnish Biotechnology, Small Business Economics, Special Issue, 1–2 (17), 105–22. Science and Technology Policy Council of Finland (1996), Finland: A KnowledgeBased Society, Helsinki: Science and Technology Policy Council. Statistics Finland (1999), On the Road to the Finnish Information Society II, Helsinki: Yliopistopaino. Suikkanen, Asko, Ritva Linnakangas, Sirpa Martti and Anne Karjalainen (2001), Siirtymien palkkatyö, Sitra Reports Series 16, Helsinki: Hakapaino Oy. Tainio, Risto, Matti Pohjola and Kari Lilja (1997), ‘Economic Performance of Finland after the Second World War: From Success to Failure’, in Sigrid Quack, Glenn Morgan, and Richard Whitley (eds), National Capitalisms, Global Competition, and Economic Performance, Amsterdam/Philadelphia: John Benjamins Publishing Company.
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Torvalds, Linus and David Diamond (2001), Just for Fun: The Story of an Accidental Revolution, New York: Harper Business. Valtonen, Markku (1999), ‘The Role of the Regional Centres of Expertise in Business Networks’, in Gerd Schienstock and Osmo Kuusi (eds), Transformation Towards a Learning Economy: The Challenge for the Finnish Innovation System, Sitra 213, Helsinki: Hakapaino Oy, pp. 284–12. Webster, Frank (1995), Theories in the Information Society, London: Routledge.
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Index absorptive capability, and innovation 76–9 absorptive capacity 66, 67–9 organization 78–9 academic core functions 215–16 academic research, Finland 299–300 Academy of Finland 152, 153, 160, 200, 202, 271, 289 Alasoini, T. 19, 293 Alasuutari, P. 38, 41 Ali-Yrkkö, J. 19, 37, 54, 58, 65, 106, 113, 114, 131, 132, 134, 269, 292 Allen, T. 69, 79 Antila, J. 135 Archibugi, D. 13–14, 304 Ark, B. van 132 Arrow, K. 255 Arrowian approach, competition legislation 255–7 Arthur, B.W. 4, 28 Ashton, D.N. 142 asymmetric information, pricing under 95–6 Audretsch, D.B. 8, 9, 303 Bank of Finland 271 Barbalet, J.M. 242 Barney, J.B. 169 Barras, R. 86 Bassanini, A.P. 8 Baumol, W.J. 259, 263 Becher, T. 198 Beck, U. 243 behavioural patterns 30–31 Behrens, T.R. 214 Bélanger, J. 128, 129, 130 Bell, D. 287 Benner, M. 198 ‘big man theory’ 9 Bijker, W.E. 11 biotechnology 20 Finland 303
Blom, R. 135, 139 Blume, S. 19, 199, 206 Boden, M. 14, 190 Bork, R.H. 258, 264 Borrás, S. 11, 17, 170 Bosch, F. 67 Bouckaert, G. 304 Boyer 293 Brännback, M. 155 Bresnahan, T.F. 14 bridging function 10 Brodley, J.F. 257, 260 Brooks Report, OECD 271 Brousseau, E. 5 Brown, J.S. 12 Bruun, H. 20, 148, 152 business competencies 101–2 business services, and knowledge creation 87–91 Cameron, R. 219 capital markets, Finland 36–7, 59 cartelization 260–62 Castells, M. 3, 7, 10, 36, 147, 148, 170, 185, 287, 288, 297, 299, 305, 309 Cayseele, P. van 259 central incomes policy 139 centralized education model 221 Centre of Expertise programmes 154–5 Centres of Excellence programmes 185, 299, 302 Chang, H.-J. 15 ‘change events’ 7–8 channelled change 4, 6 Clark, B.R. 198, 216 Clark, K. 69, 78 client relationships 89–90 clients, as a source of knowledge 91 co-operation, Finland 294–5 cognitive dissonance 31, 32
315
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‘cognitive lock-in’ 8 Cohen, W. 66, 67, 68, 76, 77, 78, 199 Coleman, M. 256, 257, 258, 260 collaboration 78–9 collaborative research mechanisms 206 collective agreements 139 collective bargaining, Finland 139 collusion, and competition legislation 262 Commission of the European Communities 251 Community Innovation Survey 86 competence society 250–51 competition, and innovation 264–5 competition legislation 21, 254–67 Arrowian approach 255–7 collusion 262 efficiency defence rules 258 Finland 258–9 relevant markets 259–60 Schumpeterian approach 255–7, 265 Tinbergen rule 259 competition optimism 255 competition pessimism 255 competition policy 257–8 competitive advantage 131 competitive strategies 87–9 competitiveness 250 Finland 33–8 Confederation of Finnish Industry and Employers 132, 134, 294 ‘contested terrain’ 12 contract research 205, 209, 213–14 financial benefits 209 knowledge transfer in 207 control rights 90, 96 Cooke, P. 147 Córdova, E. 243 corporate co-operation agreements, Finland 133 Cowen, R. 250 Cowling, K. 37 creative destruction 290 Creed, W.E.D. 29 CSC News 299 David, P. 4 ‘decreasing returns’ regime 28, 31 Demsetz, H. 261
development paths, negative feedback from 13–14 DiMaggio, P.J. 29 direct technology policy 14 discursive co-ordination, Finland 304–5 Dosi, G. 4, 7, 8, 80 Duguid, P. 12 Dunning, J.H. 37, 38 Dyke, M. 250 Easterbrook, F.H. 257 Edqvist, C. 196 education and employment 244 Finland 51–2, 152–4, 159–60, 178, 224–30, 297–8 and the knowledge economy 297–8 in the learning economy 219–24 sequential model 298 transition policies 223 and working life 249 Education at a Glance 2000 220 educational reform, Finland 224–30 Edwards, R. 251 Elam, M.J. 129 Eliasson, G. 67 employment and education 244 older workers 247–8 societal conditions 243 employment contracts 139 employment relations 138–41 endogenous change processes 8–12 entrepreneurs 8–9, 161 entrepreneurial firms 10 environmental change 30 EPOC Research group 134 eTampere Programme, Finland 185–6 Etzkowitz, H. 196, 206 EU (European Union) 48, 201 funding 201–2 research programmes 272, 279 structural funds 172, 175, 182 Eureka 272 European Commission 246 European Industrial Regions Association (EIRA) 302 Eurostat yearbook 243 Eurydice 220 Evangelista, R. 86
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Index Faulkner, W. 199 Federation of the Finnish Electrical and Electronics Industry 110 Festinger, L. 31 Finland 18, 21, 29 academic research 299–300 Academy of Finland 152, 153, 160, 200, 202, 271, 289 Act on Restraints of Trade 258, 262 biotechnology 303 biotechnology-related research 154 BioTurku 148, 151–9 BioCity building 152 Centre of Expertise Programmes 154–5 connectivity 164 education capacity 159–60 education and research 152–4 employment 161 entrepreneurship 161 extra-regional collaboration 161–2 organizational chart 168 performance 159–63 public commitment 162–3 real estate development 157–8 research performance 160–61 strategy 155–6 transparency 164–5 capital markets 36–7, 59 Central Board of Research Councils 271 central incomes policy 139 Centres of Excellence programmes 299, 302 Centres of Expertise 58, 184, 201 co-operation 294–5 collective bargaining 139 competition 268 Competition Authority 258 competition legislation 258–9 competitiveness 33–8 Confederation of Finnish Industry and Employers 132, 134, 294 content-producing industries 51 corporate co-operation agreements 133 Datatie (data carrier) 58 Development Plan for Education and University Research (1993) 201 discursive co-ordination 304–5
317 economic collapse (1990) 36 education 51–2, 229, 297–8 educational policy 227–8 educational reform 224–30 electronics industry 293 employment 243–4 opportunities for influencing one’s own work 136–7 qualifications of the employed 245–6 Employment and Economic Development Centres 193, 302 employment relations 142 engineering 298 eTampere Programme 185–6 exports 53, 65 to Russia 150 Federation of the Finnish Electrical and Electronics Industry 110 Finnforest Oy, case study 74–6 Finnish Industry Investment Ltd 59 Finnish National Fund for Research and Development (Sitra) 59, 183, 271, 289 Finnvera 183 foreign direct investment (FDI) 36, 37, 296–7 funding of university research 200–201 GDP 34, 52, 56, 69, 106 globalization strategies 296–7 government intervention 278–9 government’s role 38 GSM (Global System for Mobile Communication) 58, 61 Helsinki Stock Exchange (HSE) 37 Helsinki University of Technology 73, 74, 75, 136 high technology production 34, 40 ICT cluster 18–19, 61–3, 131–2, 141, 183–4, 268, 277, 280–81, 291–2, 293, 308 impact on economy 52 structure 49–52 ICT sector 47–8, 184, 307 Imperial Telephone Decree 58 industrialization 288 industry-university linkages 301 innovation 277–8 in knowledge service firms 96–100
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innovation support organizations 183 internet 60 knowledge economy model 287–310 knowledge-intensive business services (KIBS) 85–105, 185, 295–6 knowledge-intensive industries 170–71 labour market 239 Linux 50 local bargaining 139 manufacturing sector 65–6 media industries 184–5 Media Tampere Ltd 181 mediated linkage mechanism 200 medium-sized companies 141–2 metal sector 140 Ministry of Education 227, 228, 238 Ministry of Finance 293, 304 Ministry of the Interior 172, 184 Ministry of Labour 191 Working Life Barometer 135 Ministry of Trade and Industry 271 mobile telecommunications 61–2 municipal sector 180–81 national development path 3 national innovation system (NIS) 141–3, 200, 273, 291 National Technology Agency of Finland (Tekes) 57, 71, 107–9, 114, 115, 122, 176, 182, 183, 200, 202–3, 272, 275–6, 279, 289, 301 networks 279–80 new mental paradigm 38–40 new production model 141–3 NMT (Nordisk Mobil Telefon) 55–6 occupational structure 245 Otawood Group 71 ‘planned economy’ 39 polytechnic reform 219–42, 302 polytechnics 224 OECD evaluation 238 post-war growth 33–4 production co-operation 133, 142 productivity growth 142 R&D 52, 54, 56, 65, 96, 107–9, 120–21, 270, 271, 300–301 business sector expenditures 289 growth of expenditure on 274–6 support for corporate R&D 276–7
R&D intensity of industries 84 Radiolinja 58, 59, 60 recession 61, 148, 149, 175, 268, 290–91 regional development 170–72 Regional Employment and Economic Development Centres 182 regional policy 301–3 Salora 55 Science Policy Council 271 science and technology policy 213, 268–82, 300–305 early years 270–72 Science and Technology Policy Council 100, 102, 200, 273, 274, 275, 278, 287, 291 Sonera 50 structural adjustment 33–8 Suomen Kaapelitehdas 55 Tampere Region 20, 170, 192 Centre of Expertise Programme 185 education and training 178 ICT sector 173, 188, 193 industrial production 173 innovation networks 189, 190 knowledge base 177–80 knowledge diffusion 180–86 knowledge use 186–90 knowledge-intensive business services (KIBS) 85–105, 185 modernization 175 output 172–33 R&D 179–80, 182 regional innovation system environment 187 socio-economic structure and development 172–4 unemployment 190–91, 193 universities 135, 177–8 value added 174 workforce 172, 174 Technical Research Centre (VTT) 71, 178, 214, 289 techno-nationalism 297 technological expertise 54 telecom competition 58–9 telecommunications equipment market 281 telephony markets 54 trade with Soviet Union 289
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Index trade unions 139 traditional industries, restructuring 292–3 Televa 55 Turku 20, 148 life science research and the pharmaceutical industry 149–51 universities 149 Turku Bio Valley 155–6 Turku Science Park 156–7 unemployment 190–91, 246–8, 306 universities 59, 116–20, 238–9, 271–2, 289, 300, 307 external funding for research 202 funding 201 reform 299–300 University of Turku 139 Valtion Sähköpaja 55 venture capital 183 Vierumäen Teollisuus Oy, case study 72–4 vision orientation 303–4 Vocational Education and Training (VET) systems 224–7, 236–8 curriculum reform 226–7, 231–2 partners 230–31 VTT see Technical Research Centre welfare state 288, 305–7, 309 wood products industry 65–83 see also Nokia Finnish Forest Industry Federation 69, 70, 71, 74 Finnish National Fund for Research and Development (Sitra), Finland 59, 183, 271, 289 Finnish National Road Administration 73 Finnish Science Park Association (FISPA) 301 Finnish Wood Research Centre 73 flexible production model 128, 130, 134 Foray, D. 4 Fordist production model 128–9, 293 foreign direct investment (FDI), Finland 36, 37, 296–7 Förster, M.F. 306 Freeman, C. 5, 6, 8, 10, 14, 17, 67, 147, 190, 270, 273 Freidoson, E. 86 Fyhr, P. 72
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Galli, R. 8, 10 Gallouj, F. 86 Garud, R. 3, 4, 6, 9, 68, 78 Gellhorn, E. 255, 259 Gibbons, M. 196, 206, 215 global competitiveness 8 globalization 7, 130 globalization strategies, Finland 296–7 Gonäs, L. 243 government intervention, Finland 278–9 Grabher, G. 5 Grant, R.M. 92 Gray, D.O. 214 Gray, J. 249 GSM (Global System for Mobile Communication) 111, 112 Hage 13 Häikiö, M. 58, 107, 108, 109, 110, 111, 112, 122 Hakala, J. 201, 203, 213 Hälikkä, S. 101, 280 Hall, P. 147 Hämäläinen, T. 5, 8, 10, 14, 18, 32, 34, 196, 287, 304 Hamel, G. 91 Hansen, M.T. 86 Harianto 67 Harrison, B. 131 Harrison, L.E. 40 Hauknes, J. 13, 86 Heilbroner, R. 29 Heiskanen, T. 251 Helkama, K. 38, 40 Helsinki Stock Exchange (HSE) 37 Helsinki University of Technology 73, 74, 75, 136 Henderson, R. 69, 78 Hermans, R. 19, 54, 58, 65, 114 Hernesniemi, H. 49 ‘high road’ strategy 56 Himanen, P. 3, 36, 185, 287, 288, 297, 299, 305, 309 Hines, P. 134 Hirst, P. 15 horizontal agreements 262 Howells, J. 170, 214 Höyssä, M. 148, 151, 152 Huff, A.S. 40 Huff, J.O. 40
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Huhtamäki Ltd 150 human capital 248 human will 8–9 Huntington, S.P. 40 Huolman, M. 37 Husso, K. 299, 300 ‘hybrid-groups’ 206 Hyytinen, A. 59, 295 ICT sector 47–8 Ilmarinen, J. 248 IMF 287 in-house technology 68 ‘increasing returns’ 4, 28 industrial performance 169 information and communication technologies (ICTs) 47 information and communication technology (ICT) paradigm 6 information technology, in knowledge services 101 innovation 4, 7, 68, 69, 99, 102–4 and absorptive capability 76–9 and competition 264–5 Finland 277–8 in Finnish knowledge service firms 96–100 and market concentration 256 in services 86 innovation failures 256 innovation networks 10 innovation policy and business competencies 101–2 in the transformation process 14–18 innovation process 256 innovation systems 215 exogenous dimension 13–14 innovation-based competition 254 institutional benchmarking 17 institutional change, in science 8, 12 institutional re-embedding 11 institutions 29 intellectual assets, rights to 90 intellectual property rights (IPR) 120, 123, 212 inter-institutional collaboration 198 International Expert Group 272 ISO 9000 standard 136 Jääskeläinen, J. 56
Jaatinen, P. 236 Jahnukainen, M. 133 Jalava, J. 293 Janasik, N. 148 Japan 67 Johnson, B. 5, 8, 17, 147 Jorde, T.M. 257, 260, 262 Kairi, M. 74, 75 Kamien, M.I. 262, 263 Kantola, A. 38 Karjalainen, S. 299, 300 Karnoe, P. 3, 4, 6, 9, 66 Kasvio, A. 290, 300 Katz, M.L. 256 Katz, R. 69, 79 Kaukonen, E. 198, 199, 200, 201, 204, 213, 294, 299 Kautonen, M. 20, 173, 174, 175, 176, 177, 181, 183, 185, 188 Kekkonen, K. 20, 298, 302 Kemp, R. 9 Kiander, J. 268 Kickert, W.J.M. 16 Klevorick, A. 67 Klijn, E.H. 16, 17 Kline, S.J. 199 Klinge, M. 289 knowledge creation, in business services 87–91 knowledge economy 190, 220 and education 297–8 Finnish model 287–310 knowledge flows 10, 221–2 knowledge production 213 knowledge services 101 knowledge transfer mechanisms 206 knowledge use 199 knowledge-intensive business services (KIBS) 10, 19 Finland 85–105, 185, 295–6 knowledge resources in 94 management of knowledge in 91–6 politics and policies of 100–104 public funding for 103 Kogut, B. 4, 28 Koistinen, P. 138, 243, 246 Koppenjan, J.F.M 16 Koski, H. 47 Koski, P. 20
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Index Kostiainen, J. 147, 148, 170 Kovacic, W.E. 255, 259 labour market 20, 242–53 Finland 239 labour market changes 220–21 labour market citizenship 248, 250 Laestadius, S. 66, 67, 69, 77 Lammi, M. 49 Lamming, R. 134 Lampinen, O. 224, 228, 235 Lash, S. 190 learning 142 learning economy, education in 219–24 learning networks 221 legislation 81 Lehtisalo, L. 224 Lehto, A.-M. 135, 137 Lehtonen, H. 306, 307, 309 Leiponen, A. 10, 19, 86, 87, 90, 92, 99, 296 Lemola, T. 21, 278, 282, 289, 291 Leppä, J. 157 Leslie, L.L. 196 Levinthal, D. 66, 67, 68, 76, 77, 78 Levinthal, D.A. 199 Leydesdorff, L. 196, 206 lifelong learning 249–50, 251, 298 Lilja, K. 138, 139, 140, 288, 289, 290, 292 linkages 10 Linnakangas, R. 20, 247 Lipponen, P. 306 Lipsey, R. 28, 278 Lister, R. 249 local bargaining, Finland 139, 140 localized learning 9 ‘lock-in’ phenomenon 3, 4–6 ‘cognitive lock-in’ 6, 8 ‘political lock-in’ 6 Lundvall, B.-A. 4, 11, 12, 13–14, 17, 141, 142, 147, 170, 220, 273, 304 Luukkainen, S. 101 Luukkonen, T. 280, 299 Luukkonen-Gronow, T. 270 Määttä, K. 13, 21, 255, 256, 260 Mäkinen, M. 55 Mäkynen, J. 74 market concentration 256
321
market niches 9 market-oriented policy 39 Marshall, T.H. 242 Martin, B. 198 Marvel, H.P. 264 Maskell, P. 66 Mathewson, G.F. 264 Mayntz, R. 16, 198 McCafferty, S. 264 McGuckin, R.H. 132 McHugh, P. 130 mechanical learning markets model 221 Media Tampere Ltd, Finland 181 mediated linkage mechanism, and policy 200 ‘mental paradigms’ 5, 30–31, 32, 33, 38–40 Metcalfe, S. 4, 5, 11, 15, 254 Meyer-Kramer, F. 214, 215 Miettinen, R. 196, 302 Milberg, W. 29 Miles, I. 14, 86, 185, 190 mobile telecommunications 61–2 Morgan, K. 147 motivation, and skills 93–5, 96 Mowery, D.C. 86 MTI 38, 40 Muller, E. 262, 263 Myllyntaus, T. 297 national development paths 3, 4–5, 7 national innovation system (NIS), Finland 141–3, 200, 273, 291 National Technology Agency of Finland (Tekes), Finland 57, 71, 107–9, 114, 115, 122, 176, 182, 183, 200, 202–3, 272, 275–6, 279, 289, 301 Nayyar, P. 68, 78 negative feedback information 31 Nelson, R.R. 4, 68, 273 network extension 210 network externalities theory 256 network model 6–7 network policies 148 networks 196, 214–15, 294 Finland 279–80 and project design 208–9 as a resource 207–9 and trust 208 virtual 256
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new organization model 5 new production model, Finland 141–3 niche concept 9 Nieminen, M. 199, 201, 204, 213, 294, 299 Nieuwenhuis, L. 223 Niininen, P. 101 Niskanen, P. 198 Nissinen, M. 198 NMT (Nordisk Mobil Telefon) 55–6 Nohria, N. 86 Nokia 19, 50, 51, 52, 55, 57, 60, 61, 65, 106–27, 171, 188, 269, 276–7, 281, 282 diffusion of know-how in universities 116–20 Finland’s investments in 107–12 and the Finnish innovation system 106, 112–21 partner network 12–13 public R&D funding 124–5 R&D 110, 113, 192 R&D funding by Tekes 107–9, 122 and the Tampere Region 177–8, 178–9 non-academic research collaboration 196–7 Nonaka, I. 92 Nordflex project 137, 142 Nordic Adviser Group 151, 164 Nordic Industrial Fund 73 Nordic Timber Council 74 Nowotny, H. 196 NUTEK 137, 138, 142 OECD 4, 6, 7, 48, 60, 61, 65, 77, 84, 100, 101, 212, 219, 220, 223, 228, 229, 248, 255, 261, 269, 270, 273, 276, 282, 288, 292, 293, 295, 298, 299, 300, 305 Brooks Report 271 evaluation of Finnish polytechnics 238 Jobs Study 274 OECD countries, structural competitiveness 35 O’Gorman, C. 173, 185, 188 Oliver, C. 32 Olson, M. 31 on-the-job learning 237
Opetusministeriö 228 Ordover, J.A. 259, 263 organizational change 5 organizational paradigm 7 organizational strategies 30 organizational trajectory 5 Orion Corp 150 Ormala, E. 289 Ormond, D. 304 Orsili, M. 66, 68 outsourcing 90–91 overall competitiveness index 34 Paajanen, T. 71 Paija, L. 18, 134, 287 Pajarinen, M. 36, 37, 59, 268, 295 Pakkari, T. 299, 300 Palmberg, C. 10, 19, 65, 294 Parkinson, D. 28 Parsons, T. 32 path creation 3, 9, 14, 15, 22 path dependency 3, 4–6, 9 Pavitt, K. 5, 7, 66, 68, 198, 199, 215 Peldán, K. 150 Pennings 67 Perez, C. 5, 6, 8, 11, 12 performance problems 31 Peters, G. 304 pharmaceutical industry, Finland 150 Pirhonen, P. 150 ‘planned economy’ 39 Pohjola, M. 29, 33, 289, 293 policy 79–81 and mediated linkage mechanism 200 policy experimentation 17 policy learning 17–18 policy networks 16–18 polytechnics 20, 224 academic drift 235 co-operation with local business 233–4 further degrees 235 multidisciplinary teaching 332–3 R&D 234 reform 219–42, 302 in regional networks 233–4 regional role 234 Porter, M.E. 18, 49, 147, 169, 170 ‘positive externalities’ 4 Posner, R.A. 255, 261
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Index post-industrial society 287 Powell, W.W. 29 power, fragmentation of 16 pragmatism 256 Prahalad, C.K. 91 price competition 254 price-fixing 263 pricing, under asymmetric information 95–6 Prihti, A. 277, 294, 301 production co-operation 130–34 public funding agencies 214 Pulkkinen, M. 37 Purchasing Power Parity 34 R&D 67–8, 78, 80, 90 Finland 52, 54, 56, 65, 96, 107–9, 120–21, 270, 271, 274–6, 276–7, 289, 300–301 funding 200–201 polytechnics 234 Tampere Region, Finland 179–80 Raivola, R. 224, 297, 298 Rakennustaito 75 Rallet, A. 5 Räsänen, K. 290 reflexive (or intelligent) benchmarking 18 regional innovation networks 147–68 regional knowledge economy 170 regionalization 169–70 regulation, and technological development 258 resale price maintenance (RPM) 264 research external funding 203–6, 213, 214 ‘interactive research mode’ 215 research joint ventures (RJVs) 262, 263 Reynolds, P.D. 300 rights to intellectual assets 90 Rinne, R. 250 Rip, A. 148 Romanainen, J. 56 Rönkkö, P. 59 Rosenberg, N. 76, 77, 199 Rosenfeld, S. 223 Rouvinen, P. 18, 36, 37, 47, 268, 287 Rowthorn, B. 15 Russia, Finnish imports 150 Ruuska, P. 38
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Sabattini, P. 259 Sabel, C.F. 8, 14, 17 Salmi, E. 250 Salminen, H. 226, 228 Salomon, J.-J. 270 Salter, J.A. 198 Sandström, U. 198 Saraste, M. 153 Sauramo, P. 306 Savola, M. 224 Saxenian, A. 301 Schienstock, G. 9, 10, 14, 15, 18, 20, 21, 32, 131, 179, 188, 190, 196, 262, 287, 293, 294, 303, 304 Schimank, U. 198 Schmid, G. 243 Schmoch, U. 214, 215 Schumpeter, J.A. 8, 68 Schumpeterian approach, competition legislation 255–7 science, institutional change in 8, 12 science and technology policy defined 269 Finland 213, 268–82, 300–305 Science and Technology Policy Council of Finland 100, 102, 200, 273, 274, 275, 278, 287, 291 science-industry linkages 197–9 Scott, A.J. 169 Scott, R.W. 29, 32 Semlinger, K. 131 Senge, P. 142 Sengenberger, W. 246 Senker, J. 199 Seo, M. 29 Seppälä, R. 174, 175 sequential model of education 298 service innovation, incentives and support 102–4 Shapiro, C. 256 ‘shareholder value’ approach 37 Sheremata, W.A. 254, 257 Silvennoinen, H. 250 ‘skill-biased technical change’ 14 skills 102, 110 and motivation 93–5 skills shortage 80 Slaughter, S. 196
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SMEs (small and medium-sized enterprises)115-16, 131, 133–4, 182, 263, 295, 296 social capital 239, 303 social constraints 33 social discourse 15–16 social exclusion 14, 190, 244 social innovation 29, 30–33, 41 ‘social practice’ concept 12 Soete, L. 7, 190, 270 Sölvell, O. 169, 170 Sörensen, K.H. 11 Sotarauta, M. 147, 170 Soviet Union, trade with Finland 289 space of flows 147, 170 special interest groups 31 Spender, J.-C. 91, 92 standardization 81 state, role in transformation process 14–16 Statistics Finland 96, 172, 180, 188, 226, 242 Quality of Work Life Survey 135 Storper, M. 17 Strambach, S. 5, 10, 16 structural adjustment, Finland 33–8 structural adjustment capacity 28–9 structural change 32, 40 structural competitiveness, OECD countries 35 Sugden, R. 37 Suikkanen, A. 20, 242, 243, 244, 245, 247, 298, 306 Sundbo, J. 86 Sung, J. 142 sustainability 14 Sutela, H. 135, 137 Sutton, J. 256 Sweden 69, 138, 271 Symeonidis, G. 262 systematic vision 15 systemic change processes 28 systemic transformation approach 287, 288 systems approach 3 systems of innovation framework 3, 11, 21 tacit knowledge 210, 214 Tainio, R. 37, 289, 290
Tampere University of Technology (TUT) 177–8 Taylor-Gooby, P. 249 teamwork 134–8, 142 technical paradigm 7 Technical Research Centre (VTT), Finland 71, 178, 214, 289 techno-nationalism, Finland 297 techno-organizational paradigm 6 technological change, continuity 4 technological development, and regulation 258 technological gatekeepers 69, 79 technological opportunities 6, 7 Teece, D.J. 256, 257, 258, 260, 262 telecommunications industry, research 109 Telia 50 Telser, L.G. 264 Teubal, M. 8, 10, 11 Thompson, G. 15 Tierney, T. 86 Tinbergen rule 259 Toivola, K. 55, 58 Tomlin, R. 153 Tomlinson, M. 10, 141, 142 Tordoir, P.P. 86 Torvalds, L. 299 Toulmin, S.E. 18 Touraine, A. 190 trade horizontal restraints 262–3 vertical restraints 264 trade unions 139, 141, 142–3 training 88–9 transformation process 12 industrial and company levels 18 innovation policy in 14–18 role of state 14–16 transformative capability 68 transition policies, education 223 Tregaskis, O. 246 Tulkki, P. 179, 237, 250, 294, 303 Tuomi, I. 12 Tuominen, C. 136 Turpeinen, O. 58 Tushman, M. 69, 79 Uhmavaara, H. 139, 140, 142
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Index UMTS (Universal Mobile Telecommunications System) 62 uncertainty 15, 243 uncertainty-reducing strategies 32 underemployment 242–4 unemployment, Finland 190–91, 246–8 universities Finland 59, 116–20, 149, 177–8, 202, 238–9, 271–2, 289, 299–300, 300, 307 reform 20 research benefits of co-operation 209–11 funding 200–201 knowledge effects of co-operation 210 problems in collaboration 211–12 and science-industry relationships 196–218 University of Tampere 135 University of Turku 139 unlocking 3, 22 US, Forest Products Laboratory 74 users 11–12 Valtioneuvoston kanslia 171, 172 value chains 133 Van der Muelen, J.R. 148 Van Meerbeck, W. 259 venture capital, Finland 183 Vepsäläinen, A.P.J. 133 Viinamäki, l. 242
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Virtanen, S. 268 virtual networks 256 vision 15 vision orientation, Finland 303–4 Vocational Education and Training (VET) systems 221, 223, 224–7, 236–8 vocational training 223–4 Walden, P. 37 Webster, F. 298 welfare state, Finland 288, 305–7, 309 Willig, R.D. 263 Wilts, A. 198 Winter, R.A. 264 Winter, S. 68 Wired magazine 47 wireless local area networks (WLANs) 62 wood products and glue-lam timber industry Finland 69–76 glue-lam timber bridges 72–4 laminated veneer lumber 74–6 work organization 134–8 work regulations 7 World Employment Report 243 Yin, R. 76 Ylä-Anttila, P. 36, 37, 47, 49 Ylöstalo, P. 135, 139 Zang, I. 262, 263
