Jussi Kajala: How should the new Government change the business subsidies in Finland?
The biggest challenge currently facing the Finnish economy is the lacklustre development of business productivity. According to the Research Institute of the Finnish Economy (ETLA), the ten companies that are the most valuable for the Finnish economy have remained competitive by cutting employees and costs.
However, Nobel Prize winner Robert Solow has calculated that 80% of long-term economic growth is generated through innovation activities, and not by implementing cost savings using current technology. Investments into research, development and innovation have unfortunately decreased in Finland by more than EUR 500 million over the past five years.
Finnish public funding for companies’ innovation activities is among the lowest of all OECD countries.
(Source: OECD, Percentage of BERD financed by the government)
When fixing the short-term deficit, we are actually eating away our future. In contrast, the miracle of Nokia and the economic boost it generated in Finland was largely based on investments into innovation made during the 1990s recession.
I believe that the Government should support private innovation activities for three reasons: market failure, leverage and external impacts. Firstly, there is simply not enough private Finnish money for funding innovation, particularly not for SMEs. Secondly, research indicates that every euro used to support the R&D activities of Finnish companies encourages them to invest another euro of their own money. In other words, funding acts as a double leverage.
Finally, external impacts are perhaps the most important of the three: developing new technologies benefits not only the company but also the users of new devices and services, namely taxpayers. The public sector can also create markets, for example in the manner outlined in the TED talk by Marina Mazzucato, Professor of Economics at the University of Sussex. Markets are created through innovative public procurement, conducted by demanding, professional buyers.
The Finnish business subsidy system is very complex. In the spring of 2014, a working group jointly appointed by the involved Finnish ministries listed the principles of good support, drafted an overview of the business subsidy situation, and suggested modifications in the system.
In short, the business subsidy system is unclear, complex and administratively burdensome. Businesses view the system as a fragmented whole where they need to commit a significant amount of personnel resources to find the correct services. Several forms of support have not been submitted to impact assessment.
Business subsidies can be roughly divided into those that encourage renewal and those that maintain the status quo. Subsidies that encourage renewal motivate businesses towards international markets and better efficiency, improve their productivity and create high-salary jobs.
Meanwhile, subsidies that conserve the status quo only maintain old structures, secure positions that have already been reached, resist change and renewal, and artificially conserve low-salary jobs.
According to the Ministries’ working group, subsidies for research, development and innovation (RDI) are among the most effective drivers of renewal in the Finnish business subsidy system. In this light it is worrying to notice that RDI subsidies have taken the sharpest downward turn in the last two years. Indeed, RDI subsidies have been reduced by more than EUR 200 million over the last two years – more than twice the amount of other subsidies.
I propose that the new Finnish Government should invest in business subsidies that encourage renewal.
Jussi Kajala, Senior Adviser, Impact Assessment, Tekes
- Large companies in a small national economy (in Finnish) – ETLA➦
- Competitiveness problem, productivity and salaries – column (in Finnish) – ETLA➦
- Technical change and the aggregate production function – Robert Solow➦
- Statistics Finland, Development of Finnish R&D investments➦
- OECD – Science and Technology Industry Outlook 2014,➦ pp. 69, 159.
- OECD – percentage business expenditure on research and development (BERD) financed by the government ➦
- Mariana Mazzucato – TED Talk➦
- Summary of the report of the Ministries’ working group on business subsidies (in Finnish)➦, list of subsidies (in Finnish)➦ and proposed changes (in Finnish)➦
- Study on tax subsidies (in Finnish) – ETLA➦