A solid foundation for future economic and productivity growth has developed within the Finnish business sector. We now have a wealth of young medium-sized enterprises that are growing and ready to provide a significant boost to Finland’s growth in the coming years. Their potential should start to reveal itself once the economic cycle finally normalises.
When navigating the forest, you should keep your eyes on the ground to avoid tripping over any stones and stumps. At times, however, you must also look ahead to avoid getting lost. Economic policy debate often focuses on short-term fluctuations: inflation, the next round of wage negotiations, and changes in employment rates. In such a case, long-term developments may go unnoticed, especially those that have been brewing under the surface.
When we look beyond today’s bleak economic figures, we can see promising structural changes within the business sector: Finnish companies have renewed their R&D activities, new and young companies are beginning to hit their stride, and the structures of the Finnish economy are changing in encouraging ways. This indicates that we have what it takes for strong long-term growth.
Economic growth comes from productivity and technology
Above all, Finland needs growth in its labour productivity, i.e. more added value per worked hour. This means companies that produce more and better-quality goods and services for every hour spent working. Quality is reflected in the customers’ satisfaction and willingness to pay for goods. Improved productivity means increased profits for business owners and better wages for employees. A boost to productivity would make it easier to balance Finland’s public finances. Moreover, growth that is based on improved productivity is ecologically more sustainable growth.
R&D is the key
Before a company starts to make an impact on the productivity of the national economy, it will often have gone through three phases. In most cases, the first phase of creating high-productivity jobs starts with the company’s investment in research and development.
Finnish companies have renewed their R&D activities. New and young companies are beginning to hit their stride.
In the early 2010s, an exceptionally high number of new and innovative small companies began to emerge in Finland. Some of them increased their research activities and have already grown into medium-sized enterprises. At the same time, many companies have renewed their R&D activities. The share of private services has grown. A growing number of R&D staff in these companies have a doctoral degree, and we can also see an increase in the share of basic research.
The graph shows the development of R&D personnel in new and young small and medium-sized enterprises in Finland from 2000 to 2021. The dashed line illustrates the trend in the overall number of R&D personnel. The frames indicate how the number of R&D personnel in young (5-9 years old) small and medium-sized enterprises has developed from 2013 to 2021.
It is interesting to note that foreign-owned, medium-sized companies have significantly increased their research and development headcount in Finland, especially in the second half of the 2010s. In other words, the skilled and deep-pocketed multinational capital has recognised Finland’s development and growth potential.
The chart shows the development of real R&D expenditures by foreign-owned companies in Finland from 2010 to 2020.
Putting technology into practice
In the second phase, innovations are taken into use and brought to the market for real-life testing. If the new products prove to be of high quality and their means of production efficient, the company has the prerequisites for profitability.
Throughout the 2010s, new firms entered and other firms exited the market at a rapid pace. Thus, the turnover rate of companies has accelerated. The share of new products in the firms’ turnover decreased in the first half of the 2010s, but a clear upward trend can be seen in recent years. Eurostat’s innovation statistics also indicate that Finnish companies have adopted new technologies at a very fast pace in the early 2020s when compared to their international peers.
Scaling up makes the difference
When a company’s R&D activities result in successfully deployed technologies, it has the financial incentives to expand its operations. The share of companies in Finland that have rapidly increased their headcount (by at least 10% per year) grew strongly in the 2010s. In the latter half of the decade, the share of employment of such companies was already higher than in Sweden or Denmark – not to mention Germany, France, and Austria, which clearly lagged behind Finland in this respect.
Finnish companies have adopted new technologies at a very fast pace in the early 2020s when compared to their international peers.
Once the technology has successfully been deployed, the companies have incentives to invest in machinery and equipment. Production capital in the corporate sector began to grow strongly in the second half of the 2010s. The foreign-owned companies, among others, significantly increased their investments in machinery and equipment at their Finnish sites in the latter part of the 2010s. They have also created many new jobs in Finland.
The graph shows the development of investments per employee by foreign companies in Finland, Sweden, Denmark, Germany, Austria, and Italy from 2008 to 2020.
Finland’s economic growth outlook is promising
Finnish companies have thus steadily built a solid foundation for future productivity and economic growth. We now have plenty of young and growing medium-sized enterprises and, based on research literature, we can now expect these companies to give a significant boost to Finland’s growth in the coming years. Their potential should start to reveal itself once the economic cycle finally normalises.
In other words, Finland’s economic growth factors are still there and in good shape. We simply need to nurture them so that they can secure Finland’s growth in the near future.
