Themes - Business & the Economy

Finland’s Economy: a National Context

The Finnish economy has undergone a profound structural change and rapid economic growth during the past few decades, despite the challenges of its remote location and relatively small population. There has been a transformation from an economy based on agricultural production in 1950 to the innovation based economy of today. There has been a commitment to social equity and a demonstration that this need not disadvantage a country’s economic performance. However, since the recession in the early 1990s this has proved more difficult to maintain and the region has seen greater spatial and social differentiation as well as an increase in inequality of personal income.

The Finnish economy was growing faster than other Western industrialized countries throughout 1980s but, faced with increasing competition from abroad, there was an economic restructuring and a shift from traditional manufacturing to high technology industries. Having industrialised relatively late, manufacturing did not play as important a role in the Finnish economy as it did in other European countries. This made the transition to a new, knowledge based industries less difficult to sustain.

The global economic downturn at the beginning of the 1990s had a more profound affect in Finland than in other western countries, coming at the same time as the collapse of the former Soviet Union: at the time Finland’s largest single trading partner. The service sector and high tech industries have since recovered whereas traditional manufacturing has not.

For centuries Finland has been dependent on world markets and international trade. The opening of the internal European market, Finland’s joining the European Union in 1995 and adopted the Euro in 1999, have supported Finland’s foreign trade. The value of exports doubled during the 1990s from 19% to 38% of GDP. Today, two-thirds of international trade is with other EU members. However, markets outside of the EU, such as the United States and East Asian countries, are more important for Finland than they are for most other EU countries. Since the end of the 1990s, EU membership and globalisation have led to a rapid increase in the flow of foreign investment in Finnish companies. There is now a significant share of foreign ownership in large Finnish companies but the stock of Finnish companies’ investment abroad is still twice that of foreign investment stock in Finland.

With a gross domestic product of US$30,818 per capita, Finland was among the 15 richest countries in the world in 2005. Finnish GDP per capita was 108% & 104% compared with OECD and EU averages and around 75% of that in the United States. Inflation, which had traditionally exceeded that of other industrialized countries, fell below 4 percent in 1986 and today runs at 1%: the lowest in the euro area.

The Finnish economy is now among the most competitive in the world. The Institute for Management Development placed Finland at number six in the world in business competitiveness in 2005 and the World Economic Forum ranked Finland as the most competitive economy in 2004. It was ranked first in terms of growth competitiveness and second in terms of business competitiveness behind the United States.

The Finnish economy is based on a concept of cooperative capitalism. There is a belief in the power of social capital and cooperation, which has been a major competitive advantage for Finnish firms and the economy. Such cooperative practice includes a consensual relationship between workers, management and government.

Finland has a history of successfully utilizing advanced technologies. In the late 19^th Century it was among the first to adopt electricity and more recently it has been amongst the leaders in forest industry technology and shipbuilding, as well as mobile communication technology. According to the Global Information Technology Report of 2004, Finland is the third most advanced country in terms of exploiting IT.

One of the major factors behind the success of the Finnish economy has been the continued investment in research and development. In 2002 Finnish expenditure on R&D as a proportion of GDP stood at 3.51% (around 5 billion euros), 50% higher than the EU average. Two-thirds of this investment came from the private sector. At the same time there has been heavy investment in human capital i.e. education and training.

Finnish researchers are at the leading edge of developments in a number of fields including forest improvement, material technology, environmental technology, neural networks, low temperature physics, brain research, biotechnology, genetic technology and communications. Nokia has been the main driver behind the growth of the mobile communications sector but there is also an established network of small and medium sized companies. In terms of patent applications per capita, Finland is ranked fourth in the world behind Japan, the United States and Germany.

Specialisation is important to a country the size of Finland if it is to be competitive in the future global marketplace. However, its reliance on the mobile communication sector makes the economy vulnerable. Demand for such technologies, products and services have demonstrated susceptibility to global economic slowdowns and in the long term, market growth may not be as rapid as it was during the 1990s. Since the turn of the millennium there has been a marked weakening in growth performance in the Finnish economy. The contribution of the ICT sector to aggregate productivity has been much smaller and increases in employment rates have been low. Income growth is faces further challenges associated with an aging population. The number of employed workers to each welfare benefit recipient could fall from 1.7 currently to 1.0 by 2030.

Finland has among the highest prices in the euro are, 23 % higher than the average. Its remote location, above average taxes, low population density and a relatively small population keep prices high. The level of household debt has traditionally been relatively low but it has been growing rapidly in recent years. Finland has a history of house price volatility which has potential damaging effects on the wider economy: a reciprocal relationship existing between house price movements and general economic conditions.

Business & the Economy in Helsinki

Helsinki is the engine of the Finnish economy and one of wealthiest capitals in Europe. The metropolitan area contributes around one third of the Finnish GDP, 1.5 times higher than the national average. In 2004, economic growth in the region was 3.2%. Its status as a capital city, good international connections, logistics network and availability of a skilled workforce mean that most large Finnish companies have their head offices and other important functions in the metropolitan area and it is the favoured location for regional head offices of international companies operating in Finland.

Until the 1960s the local economy was reliant on engineering, printing and textiles. The service industry has since overtaken manufacturing as the main generator of wealth in the region. Traditional industries that suffered heavily during the recession in the 1990s and have never really recovered. The service sector was also affected but has since continued to grow at an increasing rate and today dominates the regional economy.

As the service sector has grown, employment relationships have undergone change. Fixed-term and part-time contracts have become more typical. An increased amount of work is carried out at home or at client’s premises. Combined work and training or employment and retirement are other growing trends.

There are currently around 48,000 businesses in Helsinki employing 280,000 people. The city’s economy is primarily service-based, having gradually moved away from heavy industry. 80% of Helsinki’s workforce is employed in the service sector. 16% work in IT. Unemployment rates remain high and structural unemployment poses a major problem. The unemployment rate in Helsinki is around 7% against a national average of 9%. The region is not as reliant as it once was on the centre for employment. In the mid 1960s the city centre accounted for 75% of all jobs in the metropolitan area. Today that figure has fallen to 40%.

Information technology and financing sectors form the backbone of Helsinki's economy. The IT industry is centred on Western Helsinki, Espoo and Vantaa. High tech entrepreneurship and start ups are yet to gain prominence in Helsinki. Relatively few start ups have achieved a global market position, despite highly favourable conditions. Despite the decline in manufacturing, Helsinki is still Finland’s main industrial city with strong printing, electronics, textiles, metal and shipbuilding industries. The Port of Helsinki, the fourth largest in the Baltic, is a focus for commercial activity. Biotechnology has a strong presence and is one of the predicted areas of growth in the future. The new Helsinki Science Park at Viikki focuses on biosciences and biotechnology. There are 3,400 retail outlets in the city employing 15,000 people. Scandinavia’s largest shopping centre called Itäkeskus with 190 shops and 27 restaurants is in Helsinki, ten kilometres east of the city centre.