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Innovative Activity in the Times of Crisis – Experiences of Finland

Innovative Activity in the Times of Crisis – Experiences of Finland. Petri Rouvinen ETLA, The Research Institute of the Finnish Economy World Bank’s Knowledge Economy Forum VIII INSEAD, Fontainebleau, France April 28 – May 1, 2009.

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Innovative Activity in the Times of Crisis – Experiences of Finland

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  1. Innovative Activity in the Times of Crisis – Experiences of Finland Petri Rouvinen ETLA, The Research Institute of the Finnish Economy World Bank’s Knowledge Economy Forum VIII INSEAD, Fontainebleau, France April 28 – May 1, 2009

  2. Take Home Message Whatever you do (as a country), do not cut (public) investment in knowledge in times of economic hardship.

  3. Why Not? • Accumulated knowledge is in the heads of those engaged  If no longer involved, some knowledge is lost forever • ½ of knowledge production is learning & training • Large adjustment costs  Hard to scale up • Clustering dynamics & localized spillovers • Path dependency • Discontinuities • Loses may be unrecoverable • Negative spirals / domino effects  Counter-cyclicalpublic expenditure+ Better opportunities+ Lower (opportunity) cost+ R&D/educ. Is 50–100% wages & related overhead  Full immediate local stimulus with upside potential

  4. In 1990 Finland Was Hit by the Deepest Crisis of Any OECD in the Postwar Era • Private & public knowledge expenditures / • Major policy shifts • Macro  Micro • Closed  Open • Pro competition • Pro globalization • Creative destruction • Incentivizing individuals & firms • The crisis marked Finland’s transition into a knowledge economy • But the foundations laid in the preceding 50–100 years! • The crisis was beneficial & necessary for restructuring

  5. A stylized view of the real educational expenditure in Finland Billions of euros,year 2000 prices This ETLA stylized view is based on Arto Kokkinen(forth-coming), Human Capital and Finland’s Economic Growth in 1910–2000, European University Institute. €6 bn 6-fold increase in volume in the last 50 years €1 bn 1890 1950 2000

  6. Finnish Annual Economic Growth 1976–2011% change of real GDP, Statistics Finland with ETLA forecasts for 2009–2011 Rapid & eventually complete opening up of the economy Collapse of the Soviet Union  Trade disruption Mismanaged liberalization  Banking crisis Domestic real estate & securities bubble Downturn in forest-related industries Finland hit mostly by the contraction in global demand rather than directly by the financial crisis per se.

  7. Domestic financial crisis,booming global demand Strategy: Export-led recovery, re-industrialization Policy: From macro to micro Unutilized human capital 1/10 of R&D outsourced Basic knowledge jobs Technical Improving competitiveness Global financial crisis,contracting global demand Strategy: Domestic demand, boost competences, “sit out” Policy: Micro-micro (?) Weak entrepreneurial spirit 1/4 of R&D outsourced Advanced knowledge jobs Non-technical Loosing ground Early 1990s vs. The Current Crisis

  8. Finnish Response to the Current Crisis • Finnish stimulus mostly not related to innovation • Social safety nets  Automatic/passive stimulus • Active stimulus, e.g., by advancing public works • +7–10% in government R&D expenditure in ‘09 • Largely competitive funding with strong public–private dialog • Consideration of previously delayed VC / angel inv. incentives? • Further tax-based R&D incentives in 2010? • Further +5–10% in 2010? • Nat. Innov. Strategy  Demand- & broad-based • Strategic Centres for STI (industry-led R&D consortia) • Restructuring public research organizations • University reform

  9. Innovation Policy Objectives in Crisis • Accumulated knowledge stock should not be lost • Stock is mostly in the heads of those engaged • Maintained by keeping the people engaged • Generation & use of new ideas should continue • Stock accessed/accumulated by having people solve problems • Creative destruction/renewal should prevail • For society the stock is enhanced by labor mobility • Focus on the innovators (= people engaged)

  10. Lessons from the Experiences of Finland • Engage in the global knowledge economy – it is the only way to a country’s lasting prosperity • Take time to build foundations from K–12 up (cf. Aghion) • Initially accept any role, however small, in the global knowledge economy – Once in, be conscious of gradually upgrading • Investing not only for economic gain but also for cultural & societal development – It will benefit the country in ways not directly measurable in money • Do not force it – Have fate in individuals/incentives • Waste or not? Depends strongly on framework conditions, business dynamics & individuals

  11. Evaluation of the Finnish Innovation System to Be Completed by September 2009www.evaluation.fi Rouvinen & Ylä-Anttila: Case Study: Little Finland's Transformation to a Wireless Giant. In Dutta, Lanvin & Paua (Eds.), The Global Information Technology Report 2003-2004. World Economic Forum. Dahlman, Routti & Ylä-Anttila 2006: Finland as a Knowledge Economy. World Bank Institute.

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