Finland: Europe’s IT Superpower
The only Scandinavian country to be a member of the 15-member Euro-zone, Finland has capitalized on its strategic geographical position as a gateway into the expanding markets of Northern Europe, as well as the rapidly emerging Russia and the Baltic states. Although Finland is the fourth richest in the Euro-zone according to its per capita gross national income (GNI), the country is one of the most sparsely populated in the European Union (EU), with forests covering two-thirds of its area, and water seizing a tenth.
Yet today, the country boasts of one of the most competitive and transparent business environments globally, and is a world leader in innovation, technology and the knowledge economy. Finland not only is a pioneer in the adoption of information technology, but equally important, has successfully forged a collaboration between the IT industry and educational institutes and research centers. It is no wonder then that the country boasts of an exceptionally skilled workforce as well.
Emerging from obscurity
Finland’s earliest inhabitants can be traced back to about 8000 BC, and were characteristically hunter-gatherers. It is widely believed that they were the Sami or Lapps , one of the largest indigenous ethnic groups in Europe. From the sixth century AD onwards, the region was exposed to the influence of the Vikings from Sweden, who used Finland as a base for trading with neighboring Russia. But the group was forced to move northward to the arctic regions, by various other tribes. In 1157, the Swedish king Eric IX, conquered Finland in order to put an end to the Finns’ incessant raids on the Scandinavian coast. The country remained under Swedish dominance for over 700 years until 1809 when it was conquered by Alexander I of Russia. The Russian revolution that broke out in 1917 marked the end of Russia’s supremacy over Finland, which eventually declared its independence on December 6, 1917.
However, the budding republic was confronted with numerous problems like famine, widespread unemployment, and a weak economy. Moreover, the society was polarized between liberal factions and Russian radical socialist hardliners, who later instigated a violent revolution in January 1918. A resistance to the radicals was successfully led by the liberals with the help of German troops, and subsequently, the parliament adopted a new republican constitution in July 1919. Kaarlo J. Stahlberg was then elected the first president of Finland. Thereafter, the republic experienced an era of coalition politics. When World War II broke out in 1939, the Finns declared their neutrality. Yet, once again pawns of the Soviets, the Finns were forcibly dragged into the war by the Soviet Union, which demanded some portions of Finland’s territory to secure approaches to Leningrad. Finland courageously resisted the Soviet troops, but eventually had to part with 10% of its territory. The country was caught again in the crossfire when Germany attacked the USSR in 1941, and used northern Finnish territory as a strategic base. Despite its steadfast neutral stance, the United Kingdom declared war on Finland, and the United States severed ties with the country. After a long drawn out strife, Marshal Mannerheim was appointed president in August 1944, and a final peace treaty with Russia was signed in 1947.
Finland was reeling under the aftermath of the war, and was forced to tackle territorial loss, resettlement of refugees, and a massive reconstruction of its crumbling industry and economy. Despite these challenges, the government was able to pull the country out of the trenches in a relatively short period. Subsequently, post-war Finland fostered international neutrality, favoring friendly relations with the then USSR, while at the same time maintaining openness with Western Europe and Scandinavia. This policy was promoted by post-war president Juho Paasikivi and his successor Urho Kekkonen.
Successive governments in Finland have largely been coalitions, most often headed by the Social Democratic Party (SDP) or the Center Party, with no single party enjoying majority support. The President who is the head of state is elected for a six-year term, with powers restricted to monitoring foreign policy. The current President, Tarja Halonen, elected in 2000, is also the first woman to hold this position in the country. Matti Vanhanen, who belongs to the Center Party, took over as Prime Minister in June 2003 after his predecessor, Anneli Jaatteenmaki, resigned due to an election campaign scandal. After winning elections narrowly in March 2007, he heads a center-right four-party coalition government in the country.
Mixing the Bucolic with Urbanity
Finland is a mélange of Swedish, Russian, Nordic, and European cultures. While the Finnish-speaking ethnic Finns constitute about 93% of the population, various sub-cultures emerge with a distinct and strong flavor of their own. These include the Finland Swedes, Sami, Romani and Tartar cultures. The egalitarian and liberal character of the Finnish society is reflected in their language, which incorporates gender-neutral words.
While the conquest of Finland by Sweden in the 12th century led to the culture being largely dominated by Swedish influences, educated Finns promoted a revival of their traditional folk traditions in the 19th century. This was the time when national literature in the Finnish language emerged, and Finnish styles were assimilated increasingly in art and architecture. One such step forward was the publication of the Kalevala, a national epic poem based on ancient Finnish folklore, by Elias Lonnrot in 1835. Similarly, Jean Sibelius created a truly national musical style, winning international accolades for Finnish music in the late 19th century. One of his landmark compositions was Finlandia, based on the Kalevala. The composition was banned by the Russian rulers as it inspired nationalistic fervor and patriotism among the Finnish.
The capital of Helsinki, situated in the Southern part of the country, is the contemporary, urban face of Finland. The city, together with the capital region, is the largest and most populous in Finland, and accounts for a quarter of the population. It generates 29% of jobs, and contributes to well over 30% of the gross domestic product (GDP).
Although today 62% of the country is comprised of urban towns and cities, a characteristic feature of traditional Finnish culture is countryside life. Finns typically enjoy their cottages by the lake, as well as going to the sauna, swimming and barbequing. In fact, the origin of the sauna is attributed to the Finns dating back to the fifth century, and since then has become an integral part of their life and culture. While it is a relaxing experience shared among family and friends, it is also entwined with their professional lives, with important business meetings often spilling over into an informal sauna session. The country boasts of over two million saunas spread across residences, companies as well as state institutions.
Finland has often been identified with Lapland, the northernmost Finnish province in the Arctic Circle, which represents 30% of the country’s land area. Yet, this region is the least densely populated, home to just 3.6% of the Finnish population. The Lapland has remained an attractive and mystical global tourist destination, with its city Rovaniemi believed to be home to Santa Claus. The ubiquitous reindeer and beautifully contrasting landscapes through various seasons add charm to the region. This region is also renowned for the Aurora Borealis or Northern Lights, which is a rare, natural colored light display in the sky, seen at night. Finland experiences ‘White Nights’ in its far north during summers, with the sun not setting for about ten weeks. In contrast, the country also weathers dark winters, when the sun does not rise above the horizon for almost eight weeks.
From agrarian society to high-tech elite
The Finnish economy has miraculously lifted itself from an impoverished agrarian society to the contemporary, modern-day knowledge superpower of today. In the 1860s, Finland was an underdeveloped economy, trailing behind most European nations, dominated by the agricultural sector. The economy was vulnerable to shocks, such as the severe famine in 1867–68, which devastated the country, wiping one tenth of its population. Finland’s GDP per capita in the 1860s was just about half of the average of Western European countries.
Finland had to virtually rebuild its floundering economy, after World War II literally left the country on the brink of disaster. The payment of war reparations to the Soviet Union exacerbated the economic distress. But his was a blessing in disguise. The reparations to the Soviet Union, which included the offering of forestry and paper products, agricultural products, and machinery, laid the foundation for Finland’s post-war economic development. The Finnish economy subsequently recorded incredible rates of growth, expanding over 5% in the 1950s and 1960s, and over 3% in 1970s and 1980s.
However, the rapid expansion of the Finnish economy encountered a major stumbling block in the early 1990s. The Soviet Union’s collapse set in motion a painful period of transition in Eastern Europe. Finland suffered from the loss of export markets. In 1991 a two-year recession began, which resulted in a 10% contraction in output, a rise in the rate of unemployment to 20%, a banking crisis, and a steep devaluation of the currency. This recession bottomed out in 1993. At that time, Finnish industrial exports and output revived after devaluation enhanced competitiveness and a recovery was seen in western export markets.
Securing EU membership in 1995, and being the first of the Nordic countries to adopt the euro in 1999, Finland leveraged its transparent and competitive business environment to integrate with other European economies. In fact, during the period 1995-2000, Finland’s employment rate was clearly benefiting from integration with the EU, and the country was one of five Euro-zone economies recording the highest rates of growth in GDP at 5%. The country can be credited with remarkable achievements. Finland ranks as one of the least corrupt countries in the world, the sixth country globally in terms of competitiveness, and the 11th according to human development. Especially noteworthy is Finland’s third rank globally on the World Bank’s Knowledge Economy Index, which is based on its economic incentive regime, innovation, education and Information and Communication Technologies (ICT). Truly world leaders in innovation, Finnish R & D investments are the third largest in the world, built on exceptionally successful linkages between education, research, industry, and the workforce.
Finland is as an ideal base for business in Northern Europe. The only Euro-zone member in Scandinavia, this Nordic country has capitalized on its long-established connections with neighboring Russia and the Baltic states of Estonia, Latvia, and Lithuania. With its long experience of trade in Northern Europe, Finland brings to the table valuable know-how and first-hand knowledge of a region dominated by over 80 million consumers. Moreover, Finland melds excellent infrastructure, modern logistics and an advanced communications network, with a competent workforce. This makes for a conducive business environment that is a hugely attractive location for many global multinationals who wish to expand to far northern markets. While over 90% of Finns less than 30 years of age speak English, many of them also speak Swedish and Russian, giving this multi-lingual country an added advantage in this region.
But it is the quality, credibility and integrity of Finland’s legal and financial institutions that have contributed substantially to the country’s economic development. The country’s institutional framework has remained constant since the time of the declaration of the Finnish republic in 1917, weathering many crises including political regime changes and wars. This is a fundamental factor that has created investor confidence in this economy.
Though the rate of growth of GDP halved in 2001 to 2.6% compared to 2000, due to the global slowdown, and further decelerated to under 2% in 2002 and 2003, the rate of growth in the period 2001-03 was above the Euro-zone average. Economic activity rebounded in 2004, expanding at 3.7%. Buoyancy in the economy continued, as the economy surged 4.9% in 2006 due to the strengthening of investment and residential construction. Private consumption also remained robust. Finland registered a 4.5% growth in 2007, which was significantly higher than the Euro-zone growth rate of 2.6%.
The quality of Finnish R&D and the technological cooperation offered by industrial partners based in the country are of the highest international standards, which attracts companies worldwide to set up research bases in this technologically savvy country. Technology has very smoothly integrated in all areas of Finnish business and personal life. The country has become “wired”, with almost all organizations including educational institutes, banks, libraries, and companies existing on brick and mortar as well as virtual levels. With e-business processes as well as online banking established early on and now firmly entrenched in the country, several of the world’s top internet security firms are also based in Finland. This makes the country a pioneer in strong encryption approaches as well. Interestingly, the Finns have the distinction of using the least physical cash per capita than any other people in the world.
With this mindset, Finland has led the path of innovation on many fronts. It is no secret that the Linux Operating System was the genius of native son Linus Torvalds. The country was also the first to launch a digital network for mobile communications and the first in the world to break new ground in the area of mobile communication devices. In fact, the country has one of the highest mobile phone and broadband penetration rates in the world. Finland not only boasts some of the strongest Information and Communication Technologies (ICT) and mobile clusters, but was the first mover in the widespread usage of internet banking.
Since the mid-1990s, the ICT industry has catapulted the Finnish economy onto the global center stage. Finland today is best identified by the Nokia brand which is the foremost player in the global network and communications equipment industry, securing the 88th rank in the Fortune 500 (2008). The company had its humble origins as a paper, rubber and chemicals conglomerate, its name derived from the Nokia River in southern Finland where its original pulp mill was located. Difficult terrain and long severe winters often made wired telecommunication devices impossible to manage in Northern Europe, and Nokia quickly envisaged the immense potential of wireless communication devices in the Nordic region. Stimulated by R&D incentives offered by the Finnish government, Nokia was able to usher in the mobile revolution. Transformed into the world’s largest manufacturer of mobile phones today, the company has its business spread over 150 countries, constituting a 40% share of the global device market in 2008.
The telecommunication equipment manufacturing industry, led by the global giant Nokia, has almost single-handedly driven the economy to an annual growth rate average of around 5% in the period 1994-2000. While the ICT industry contributes to over 10% of Finland’s GDP, Nokia constitutes about half of this.
Finnish know-how abounds
The country also has a thriving healthcare industry, in which healthcare centers as well as hospitals are networked into a comprehensive system, which is unique in the world. The Finns specialize in the development of innovative healthcare products, especially hi-tech medical equipment, 90% of which is exported globally. Biotechnology is also a flourishing area, with one out of every ten European companies in this sector hailing from Finland. Many of these small biotech companies offer excellent research co-operation opportunities to the large international pharmaceutical companies. To encourage innovation in the biotechnology sector, Finland has developed biotech science parks as “excellence” centers. Located in Helsinki, Turku, Kuopio, Tampere and Oulu, these think tanks provide a fertile ground for networking and co-operation between local universities, public research institutes, local university hospitals, relevant small and medium-sized enterprises and the R&D units of large companies. Finland has succeeded in integrating the use of IT and communications technology in this sector, which gives the country a unique advantage.
With forests covering close to 70% of Finland’s area, the country also touts a buoyant forest economy, which contributes over 10% of GDP, a substantial 30% of industrial production, and about 40% of net export income. The hi-tech Finns have successfully and profitably integrated intelligent and resource efficient production technologies, sustainable forest management, and a proactive customer-centric approach through Forestcluster Ltd., a new innovation company founded in March 2007. Owned by the forest industry, machinery and chemical suppliers, research institutes and universities, the company’s goal is to double the value of the cluster’s products and services by 2030, and increase the use of domestic wood by 25%.
Finland’s technical competence extends to industry-specific environmental solutions and energy production. It is a global leader in environmental sustainability, ranking fourth worldwide in the Environment Performance Index (2008). This index provides benchmarks for national pollution control, as well as management of natural resources, biodiversity, and climate change. Finnish companies in this sector offer cutting-edge, state-of-the-art environmental technologies that also provide a significant return on investment. Finland has world-class expertise in combined heat and electricity production, technology for large-scale environmental projects, waste management and energy production, all fostered by close cooperation between major research institutes and universities. Supported by national energy and forestry programs, Finland’s heat and energy producers effectively utilize the country’s vast forest reserve to supply electricity and heat to local municipalities and businesses, using clean technologies.
Several global mining companies are also lured to Finland by the country’s potential in the mining of platinum group metals, base metals, diamonds, industrial minerals, and gold. They are drawn by Finland’s political stability and conducive business environment, which offers favorable and secure leasing policies, a highly developed infrastructure, and skilled workforce.
Supported by strong domestic consumption, retail trade in Finland has been climbing, recording a 5% growth in 2007 over 2006. Home electronics, hardware and décor stores, and pharmacies are driving this growth, with retail trade in fashion, cosmetics, and sports closely following suit. The Finnish retail sector, despite attracting several foreign chains, is likely to witness some slowdown in 2008 in the wake of the current worldwide credit crunch.
The country’s real estate market, also a growth driver for the economy, doubled transaction volumes in 2006 to €5.5 billion ($7.4 billion) and further to €5.8 billion ($7.8 billion) in 2007. Foreign investments constituted about 65% of the volume in these transactions. Reflecting the strength of the retail sector, 36% of all property transactions were in the retail property business, with this business growing the fastest in city centers, where demand for shopping centers is the highest. Meanwhile, the Helsinki metropolitan area is experiencing immense growth in business park development as well as modern office complexes. The country’s housing market, on the other hand, has succumbed to the ripple effect of the financial crisis. This sector, which witnessed a steady price climb since 2002, is now seeing prices cool off. Aside from general loss of confidence in the world financial systems, the European Central Bank’s (ECB) continuous increase in the interest rate from historic lows in 2003 until the middle of 2008, is a principal contributor to Finland’s current housing malaise. Now of course with a global slowdown setting in, the ECB has been cutting interest rates.
Business aside, Finland is a favored destination for pleasure trips with its pristine surroundings and high level of safety and security. The World Economic Forum positions Finland 16th among 130 countries according to its Travel and Tourism Competitiveness Report (2008). The number of foreign visitors increased 13% in the period from November 2006 to March 2007, compared to the previous winter, according to the Finnish Tourist Board. The World Travel Tourism Council (WTTC) estimates that the total demand for travel in Finland is estimated to jump by 33.7% between 2006 and 2016.
Recent Developments: Resilience to the global economic turmoil
The fallout from the global financial turmoil has posed new challenges for Finland. One of the best performing Euro-zone economies, Finland registered a GDP growth of 4.5% in GDP in 2007, supported by buoyant consumption and investment. However, 2008 heralded a sharply slowing economy as consumer and business confidence receded amid heightened global uncertainty. In fact the second half of 2008 saw Finland entering a recession, as did many other Euro-zone countries, with its second and third quarter GDP contracting 0.3% and 1.3% respectively. With 56.8% of total Finnish exports shipped to the EU, the economy is now facing a virtual stalling of demand from the recession-torn 27-member bloc, with its exports falling over 14% in the last quarter of 2008. The country’s real GDP growth rate has slowed down drastically to 0.9% in 2008 and is expected to stage a modest recovery in 2009, clocking 1.3%. Although the broader global economic deceleration has dented Finland’s economic fortunes, with strong economic fundamentals, the country remains well equipped to counter the slowing pace of growth. While the current account surplus hovers around a sizable 4% of GDP in 2007, the position of government finances is also comfortable, with fiscal surplus recorded at over 5% of GDP in 2007. Given the economic slowdown, the fiscal surplus is likely to decline to 4.7% of GDP in 2008. General government debt also remains reasonably low at about 35% of GDP, almost half the Euro-zone average.
A key feature that threatens Finland’s competitiveness is the upsurge in real unit labor cost, which escalated 3% in 2008, relative to a 1.5% decline in labor costs for the Euro-zone as a whole. With firm-level flexibility remaining weak in the country, decentralized wage negotiations remain uncommon. The wage-price spiral could be a real risk to the global technology giant, which has seen consumer price inflation more than double to 3.9% in 2008 compared to 1.6% in 2007. While increases in energy and food prices in the first half of 2008 are reflected in this high inflation figure, the price level still remains higher than the Euro-zone average of 3.3% for 2008. Longer-term fiscal sustainability is also likely to be hampered by a rise in the old-age dependency ratio, if not accompanied by reductions in aging-related entitlements, other spending, or increases in labor productivity and revenues.
On a positive note, the Finnish financial sector has displayed remarkable resilience to the global financial meltdown, with risks of exposure to toxic assets remaining low. However, the continuing uncertainty in the global financial markets has resulted in lower growth and less profitability for the banking sector, which has 60% of its assets as foreign-owned.
Euro-zone’s Nordic representative stands strong
Challenges notwithstanding, the Finnish economy continues to exhibit strong fundamentals and a remarkable resilience to drastic changes in the external economic environment.
Finland’s strengths clearly lie in its integration with the Euro-zone, which has seen the country emerge as a powerful link to Northern Europe as well as the Baltic states. This northernmost Euro-zone country has effectively carved a niche for itself as a top-notch knowledge and technology stalwart. While technology remains its forte, Finland has taken strides towards diversifying its economic base. Endowed with abundant forests, the country excels in forest products as well, thus proving its versatility through its contrasting competencies. This dynamic spirit has indeed worked well for the country, an erstwhile agrarian society, which never disregarded its roots. Now transformed into an IT superpower, Finland still embodies the essence of a peaceful and contented country life.