THE COMPETITIVE

ADVANTAGE OF FINLAND

A country analysis based on Michael Porter’s Diamond of National

Advantage Model

Submitted By
Leonard Mutebi
Market Analysis, Coursework

ALTIS MBA 2009

Catholic University of Milan
7th December 2009
mutebil@gmail.com
 Introduction

Based on Porter’s framework, I perform and present an analysis of

Finland’s success. I identify three key phenomena that underscore this
position, in contrast to a set of comparative weakness factors. Lastly, I
propose, and strongly, three policy recommendations to improve this
country’s long-term competitiveness.

Country Background

Finland is an advanced economy with a history between the Nordic

and the East. It was a province of Sweden from the 12th to the 19th
centuries. After 1809, Finland became part of the Soviet Union as an
autonomous grand duchy of Russia. The country acquired her
independence in 1917.

Finland joined the United Nations in 1955, the OECD in 1969, the
European Union in January 1995, and the Eurozone since its beginning
in 1999.

Finland has a representative democracy. It uses the unicameral system.

The parliament has 200 members elected on 4-year terms. The
president serves as the head of state, and is elected every 6 years, no
more than two terms. The current president is Tarja Halonen. The
prime minister, who also heads the parliament, serves as the head of
government.

Around 5.3 million people reside in Finland, concentrated mainly in

the South. In terms of area, Finland is the eighth largest in Europe.
However, with only 17 people per square kilometer, it’s the most
sparsely inhabited EU nation. 92% of the population speaks Finnish,
6% Swedish. 61% Finns reside in urban areas! 2.5% of the citizens are
foreigners.

The country was a relative late-comer to industrialisation. She

remained largely agrarian until the 1950s. Thereafter, economic
development was rapid, and the country reached the world's top
income levels in the 1970s. Between 1970 and 1990, Finland built an

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extensive welfare state. In the 80s, a process started of moving out of
an investment-driven economy into an innovation-driven economy.

With the collapse of the Soviet Union in 1991, Finland reached a crisis.
In the aftermath, successive governments made several policy changes
and wide reforms to airt the economy through privatization,
deregulation, and broad fiscal reforms.

By 2002, Finland became one of the most competitive economies in the

world. A large part of the success is credited to the dynamic
telecommunications cluster. During 2000-2005, this cluster grew at
12%, accounted for some 30% to 45% of exports and about 8% of GDP!

Overview of Porter’s Diamond Model

Porter said, “The wealth of a nation is not inherited, it is created.” The

“Diamond of National Advantage” Model provides a framework to
analyse the factors that determine a country’s competitiveness. The
diagram below, summarizes the model.

The four factors—called “determinants”—represent the conditions

relevant for national success. Individually, and as a system, they
contribute to the country overall competitiveness. I now apply the
framework to Finland.

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 Finland‘s Competitive Advantage

Analysing the micro and macro factors in Finland highlights the

sources of her success. In terms of the Porter Model, I describe it
below.

Factor Conditions

Plenteous in Finland, is a set of well-developed production-relevant

conditions. Among these include; skilled labor, infrastructure,
technology and innovation-capabilities that are necessary to compete
in a certain industry.

The country’s education system supports a quality public education.

Nearly 70% of the population aged 25 to 64 has completed upper
secondary or tertiary education, and 30% (the highest in EU) have
university or other tertiary qualification. The country supplies the
largest number of scientists and engineers among the OECD.

However, with an average age of 41 years, the country harbours an

ageing population.

The country’s extensive communication infrastructure, comprising

extensive digital fibre-optic and broadband networks, provides
domestic and international connectivity. Cellular coverage is
ubiquitous. It is argued that Finland’s sparse density propelled her
need for rapid development in mobile communications. All most
everyone in Finland has a mobile phone! It is one of the most
developed information communities of the world.

Transportation is extensive. Road, is the most popular mode of

transport in Finland. Nevertheless, the country has over 20
international airports and over 100 airfields. Moreover, a modern
urban rail system serves the Greater Helsinki Metropolitan — albeit, it
has less connections in rural areas than buses.

Finland invests heavily in innovation. A national innovation

programme administered jointly by the ministry of employment and
industry drives the country’s innovation engine. It ranked 1st among

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18 OECD countries for technology patents registered in 2003. R&D
expenditure is above OECD average. The country furnishes more
researchers than most OECD members.

Demand Conditions

Although a small country, Finland’s domestic market is strong. The

ever demanding customers in this country have always placed greater
pressure on firms to constantly improve offerings. The desired effect is
that of increased competitiveness via innovative products. Overall,
buyer sophistication and customer orientation is remarkable (18/130,
and 27/130 respectively), in recent statistics.

Per capita income is higher than the EU average and unemployment is

relatively low. The country enjoys dynamic household consumption,
thanks to healthy employment levels and dynamics savings.

Related Industries

Like every successful economy, the spatial proximity of upstream or

downstream industries is crucial to Finnish industrial cluster as well.
Their presence facilitates the exchange of information and promotes a
continuous exchange of ideas and innovations – hence creating
internationally competitive industries.

Key clusters include: information and communications, forest, metal

processing, mechanical engineering, foodstuffs, business services,
construction, energy and the healthcare cluster. The well-being of
Finland benefits heavily on the success of these clusters and of their
key industries – on the increase of production, on the employment
trends and on the export revenues they acquire.

Other industries, of which some are substantial, such as trade,

transportation and transit, have followed the developments in
industries within the key clusters.

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Moreover, Finland forms a good home-base for a surprisingly diverse
group of internationally and potentially competitive clusters. The
forest cluster is an example of an ultimately highly developed cluster,
whose leading companies have been able to acquire business on a
global scale.

For a small country, Finland has relatively strong metal processing and
metal engineering sectors. While many of these clusters are geared to
the domestic market, the metal, building materials and particularly the
electronics enjoy strong exports.

The information and communications cluster, whose development has

been based on expertise and technology development, has grown to
become a second pillar of the economy. This cluster - which has been
heavily dominated by Nokia - has acted as the main conveyor of
innovation in Finland, helping also smaller firms to get involved in
innovation processes.

Business services and the healthcare cluster are service clusters, whose
relative importance is increasing. For instance, healthcare will consist
of networks evolved around strong technological engines, of which the
strongest are the company groups applying information technology,
electronics and tissue and biomaterial technologies.

Firm Strategy, Structure and Rivalry

Since the l970s, the Finnish government constantly adopted policies

aimed at creating a progressive business climate. In a dynamic world
dominated by direct competition, the nature of conditions governing
how companies are created, organized, and managed as well as their
domestic rivalry may be the difference between the leader and the led!

Finland is on the top. It ranked 4th on the Ease of doing business index
(2005 World Economic Forum). Moreover, this has been improving. It
ranks 4th in 2009 on the number of procedures required in starting a
business. On average, it takes a new business 14 days to open shop.

The sophistication of Finnish firm’s operation and strategy, in terms of

the nature of competitive advantage and breadth of value-chain

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remains strong, despite a modest performance on foreign market-size
(49/130). Moreover, many firms have built solid branding and
marketing capabilities. For instance, Nokia’s dominance in the mobile
market, against world giants such as Motorola, is credited to its strong
positioning strategies. Nokia succeeded in building a brand around a
mobile phone as a fashion item and not a tech-gadget.

Openness to FDI, thanks to government policy, is even stronger.

Finland accrued, on average, 1.2Bn Euro net-inflows annually during
2001 and 2004. Moreover, Finland doesn’t discriminate between
foreign and domestic entrepreneurs through distortive tax exemptions.
Anyone is open to acquire a Finnish firm.

According to the Global Competitiveness Index (GCI- World Economic

Forum-2003-2004), Finland ranked 1st among 102 countries. With a
rank of 5.95, the country came ahead of the US (5.82) and Sweden
(5.72) while the UK, Germany and Australia with 5.3, 5.28, and 5.25
came in 11th, 12th and 13th positions respectively. In 2009/10 the rank is
estimated at 6th position among 130 countries.

Notwithstanding, the country’s quality of public institutions is, on the

overall, outstanding. The 2009/10 GCI report ranks Finland 1st
considering; property rights, intellectual property protection, ethics
and corruption. Moreover, Transparency International ranks Finland
6th in its recent 2009/10 Corruption Perception Index report.

Recent economic performance

A highly industrialised, largely free-market economy, Finland’s per

capita output is roughly that of the UK, France, Germany, and Italy.
Manufacturing - principally the wood, metals, and engineering,
telecommunications, and electronics industries - remains the key
economic sector in the country.

In 2008, GDP (purchasing power parity) was $36,900, up from $36,600

in 2007. De-composed by sector to: agriculture 2.8%, industry 32.4%
and services: 64.9%.

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Although Finland has been one of the best performing economies
within the EU in recent years and its banks and financial markets have
avoided the worst of global financial crisis, the world slowdown has
hit export growth and domestic demand and will serve as a brake on
economic growth in 2009 and 2010. The slowdown of construction,
other investment, and exports will cause unemployment to rise.

During 2007-2008, imports increased more than exports, stretching

local consumer prices. While imports rose by a whopping $9.29 billion,
exports only increased by $6.42Bn in the same period.

Consequently, consumer inflation moved up to 4.1% from the 2.5% in

2007. Commercial bank prime lending rate stayed at 5.04%. The
country enjoyed some ease on unemployment from 6.9% in 2007 to
6.4% in 2008. However, in the recent economic slowdown,
unemployment is expected to climb to over 8% of the labor force in
2009.

External debt increased from $314.1 billion in 2007 to $332.2 billion by

the 31 December 2008. The country’s external debt ranked 25th
compared to other world economies.

Key strengths of Finland

The country thrives on innovation. Even in tough economic seasons,

the country has maintained a dedicated investment in Research and
Development. On average, the government spends close to 3.5% GDP
on R&D, the highest among OECD, and most EU.

Finland is well-placed in terms of national infrastructure: education,

transport, health care and communications. This set of conditions has
helped the Finland build a strong industrial economy.

However, most importantly, is Finland’s quality of institutions. This

provides a flourishing backdrop fuelling domestic and locally owned
foreign investments, Foreign Direct Investments, Mergers and
Acquisitions, and openness to foreign markets.

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 Key weaknesses

Long-term challenges in Finland include the need to address a rapidly

aging population and decreasing productivity that threaten
competitiveness, fiscal sustainability, and economic growth.

Moreover, the country’s dependence on the electronics, mobile market

industry exposes it to the pitfalls of a sectoral economy.

Again, the Finnish government still bears a heavy public expenditure.

This implies, left un-checked, a growing public debt could diminish
the country’s competitiveness.

Key Policy recommendations

In order to bolster competitiveness, Finland can leverage on many of

its political will, and economic infrastructure to improve performance.
However, the following policy recommendations are worthy
consideration.

Accelerate Diversification

The government should accelerate its diversification out of the

dominant electronics & mobile sectors. This is aimed at creating a
multi-polar economy through growing investments into other sectors
like financial and healthcare services.

Social Reform Policy-Mitigate an aging population and Increase long-

term productivity

Long-term competitiveness of Finland largely depends on availability

of skilled workforce in the country. Potential sectors —healthcare,
financial, and business services are less amenable to automation. In
most of them, automation is not expected to overtake or even
substitute the value created through the presence of human
interactions. Thus, it behooves the Finnish government to fashion long-
term strategies to shape a sustainable and productive workforce.

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One suggestion is to delay or lift entirely the retirement age! However,
dealing with productivity issues requires long-term social reforms.
With only 2.5% foreign citizens, Finland can still rely on an alien
workforce. Elevating government’s efforts to attract top young talent
from the world (the US, UK are legends here) through improving
labour laws may confer some relief. But, long-term success can only
benefit from this immigrant population contributing the needed social
reform.

Shrink public expenditure

The fact that public services remain the largest employer (32.4%) in
Finland isn’t all folly! In it lies great latitude to trim redundancies, cut
public expenditure, while improving service delivery. Non-critical
sectors and areas such as higher education should be privatised- and
redirect investments into more worthy areas such as R&D, public
health care and infrastructure.

Conclusion

Finland has built a strong economy over the past 5 decades.

Nevertheless, as new global players (Brazil, Russia, India and China,
for example,) emerge, the government must adopt new policies in
order to stay competitive. As Porter stated, and I quote, “a country’s
long-term competitiveness depends, largely, on its ability to upgrade its
sources of competitive advantage”- and Finland is no exception.

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