Strength underpinned by forest products and IT

Finland's current prosperity is based largely on the global success of two clusters: forestry and IT. Both are good examples of Finns' skill in exploiting their expertise through cooperating and working together in areas such as R&D for everyone's common benefit.

Finnish manufacturing has gone through a relatively large structural change over the past couple of decades. The volume of electronics industry exports, in particular, grew very rapidly during the 1990s, and the industry is now Finland's largest exporter, surpassing the country's traditional number-one exporter, forest products. (See Figure 1)
Figure 1. Source: National Board of Customs, forecasts by ETLA: The Research Institute of the Finnish Economy 2001.
This structural change has also been reflected in export prices. Export prices usually fluctuate in raw material commodity manufacturing according to the state of the business cycle. When international demand is high, export prices go up, and vice versa. In the rapidly growing electronics industry, however, export prices tend to fall steadily per quantity and quality unit, as R&D activities enhance the quality of new products.
The international cost-competitiveness of the electronics industry has developed well, despite falling export prices. One of the reasons for this has been that the growth of labour productivity in the industry has been the fastest of any sector in Finnish industry. The cost-competitiveness of the paper industry has also developed more rapidly than the industrial average.
While the trend towards specialisation in more competitive technology-driven sectors enhances the growth opportunities of the overall economy, it also brings with it greater risks because of the greater variability of earnings and growth rates. Over the short term, the Research Institute of the Finnish Economy (ETLA) expects that the relatively high growth rates of the Finnish economy typical of recent years will slow down. Economic growth will grow faster than the EU average, however.
Rapid, technology-driven quality improvements

Price levels in an industry are shaped very much by the speed at which new products are developed and new product properties are introduced.
For example, a new-generation mobile phone may cost as much as the one it replaces in nominal units. As it offers a larger feature set, however, the user gets more 'bang for his bucks'. One mobile phone 'unit' today therefore is not directly comparable with one 'unit' last year, taking this quality improvement into account. This is one reason for falling prices in the industry; competition also exerts a downward pressure on pricing.
Although the paper industry is not going through such a rapid process of product differentiation and new product development as the electronics industry, it too is steadily developing its product line-up. Enhanced and new products accounted for almost 12% of turnover in the Finnish paper industry in 1996, for example. New products accounted for over 60% of turnover in the electronics industry over the same time-frame.
Pulp and paper prices are affected strongly by development in the business cycle. The growth in export demand and economic growth during 2000, for example, was quickly translated into higher paper product prices. Slower growth in 2001 was translated into lower prices.
In contrast, increased demand for electronics products did not boost export prices; average prices continued falling. The different structures of the export price paths of these products serve to weaken the fluctuations in gross export price levels. (See Figure 2)
Figure 2. Source: Statistics Finland, ETLA: The Research Institute of the Finnish Economy 2001.
Enhanced productivity through better technology

Pulp and paper's number-one exporter spot was taken over by the electronics industry, particularly telecommunications, during the 1990s. A major factor in this development was Nokia's strategic decision to sell off its non-electronics activities and concentrate on a much narrower range of core businesses. In particular, this resulted in the emergence of a new network of partner companies in electronics, plastics, software, and services.
One aspect of the role of Nokia in Finland can be gained from the fact that Nokia's share of total R&D expenditure (including the public sector) was more than 20% in 1999. The size of this commitment also goes a long way to explaining the fast growth in the productivity and competitiveness of the Finnish electronics industry compared to competitors elsewhere. (See Figure 3).
Figure 3. Source: ETLA: The Research Institute of the Finnish Economy 2001.
The pulp and paper industry has also improved its international cost-competitiveness from the late 1990s onwards, thanks to process development and the modernisation of production resources. Relative unit labour costs have also improved.
The electronics industry dominates the cost competition race, despite the fact that its business strategy lies in product differentiation. Over the next five years (2001-2005), the growth in productivity in the sector is expected to slow, but it will remain the fastest in Finnish manufacturing. This will make it possible to maintain sufficient growth rates without increasing labour needs.
The pulp and paper industry has also enhanced its cost-competitiveness compared to pulp and paper companies in Finland's key export markets, and more effectively than manufacturing generally, excluding electronics. The indications are that this trend will slow in the near future, as it will in electronics. Now that Finland is part of the Euro area, it can no longer make use of devaluations to soften the impact of developments elsewhere, as was done during the 1990s.
New product development

The Finnish paper industry has moderate, but stable growth prospects. As a result, the market capitalisation of companies in the field is also relatively stable. No major new investments are on the horizon in Finland, with modernisation and upgrades the main focus of attention.
Growth prospects in the electronics industry, in contrast, are much higher, but are more risky in respect of the greater variability of future earning prospects. When one company, Nokia, exports almost 20% of the country's total gross merchandise, its sales performance has a major impact on overall developments.
Nokia's growth prospects improved in summer 2000, and its contribution to the Helsinki Exchange (HEX) market capitalisation grew rapidly (see Figure 4). Prospects weakened at the beginning of 2001, and Nokia contributed negatively to the HEX market capitalisation. The electronics industry's contribution to merchandise exports appears to vary on average by a three to four months delay compared to financial market changes.
Figure 4. Source: Helsinki Exchanges, National Board of Customs, calculations by ETLA: The Research Institute of the Finnish Economy 2001.
The strong link between the financial markets and electronics exports may be linked to the relatively small size of the Finnish economy. It also stems from company-specific business and logistics strategies.
Up until now, Nokia has built all its new products in Finland first. After confirming that production runs well, it is duplicated elsewhere. The development of new products, therefore, enhances the growth prospects of the business (and the stock price); after a short lag, it also affects the growth rates of Finland's entire merchandise exports.
Overall then, the rapid technological potential for change in production processes and technical product differentiation enhances future growth abilities. At the same time, rapid technological change also enhances the risk of doing business.
The electronics industry has made a major contribution to Finland's economic growth over recent years. Given the size of its role and the fundamentals of the industry, the growth prospects of the Finnish economy can be expected to vary more than previously.
Figure 5. Sources: National Board of Customs and ETLA: The Research Institute of the Finnish Economy 2001.
Further reading:

Ali-Yrkkö, Jyrki (2001): Nokia's network - gaining competitiveness from co-operation. Series B 174, ETLA, The Research Institute of the Finnish Economy, 100 p.
Ali-Yrkkö, Jyrki - Paija, Laura - Reilly, Catherine - Ylä-Anttila, Pekka (2000): Nokia - a big company in a small country. Series B 162, ETLA, The Research Institute of the Finnish Economy, 56 p.
Hazley, Colin J. (2000): Forest-based and related industries of the European Union - Industrial districts, clusters and agglomerations. Series B 160, ETLA, The Research Institute of the Finnish Economy, 427 p.
Paija, Laura (ed.) (2001): Finnish ICT cluster in the digital economy. Series B 176, ETLA, The Research Institute of the Finnish Economy, 178 p.
Piepponen, Anna-Kaarina (ed.): The Finnish economy and society. Centre for Finnish Business and Policy Studies (EVA) and The Research Institute of the Finnish Economy (ETLA), no. 3 / 2001.
Raine Hermans, ETLA, The Research Institute of the Finnish Economy
www.etla.fi