Over the past few years, Finland has boasted one of the most competitive economies in the world. According to The Global Competitiveness Report 2006-2007 (WEF), the small Nordic country left behind the US, its Nordic neighbours and even the east Asian tigers.

In the most recent competitiveness comparison from business school IMD, Finland ranked eighth. A number of other international competitiveness indicators have recently ranked the country one of the world’s most competitive nations. With just 5.2 million people and GDP per capita of $32,880, Finland, along with Ireland, has been among the top EU performers in terms of growth and competitiveness.

In the booming 1990s, the dramatic expansion of Nokia, the world’s leading mobile communications giant based in Helsinki, accounted for much of Finland’s growth, along with Finnish corporate giants in forestry, metals and machinery, and chemicals.

Not so long ago, Richard Florida, professor of public policy at George Mason University in the US, listed Finland among the chosen few world leaders in technology and in the ability to attract top creative talent. Why shouldn’t such a competitive economy enjoy strengths in international capital, talent and ideas?

Different reality

The realities are more complex. From the late 19th century to the early 1990s, Finland’s draconian restrictions on foreign investment – by some estimations, the most restrictive in the developed world – have explained the minimal role of inward FDI in the Finnish economy. The rationale of the legislation can only be understood in the context of Finland’s long struggle for self-determination.

During World War Two, the Finns defended their newly won independence against the Soviet Union. In the post-war era, the country coped with the difficult years of war reparations and reconstruction, while the new ‘special relationship’ with the Soviet Union forced it to reject the Marshall Plan and membership of NATO. Through the Cold War, the Finns performed a difficult balancing act to ensure market access to capitalist western Europe and socialist eastern Europe.

Internal change

The situation began to change only in the 1980s, when the Finns, encouraged by restructuring and the opening up in the Soviet Union, initiated deregulation, liberalisation and privatisation in key sectors of the economy (such as telecoms and banking). With the collapse of the Soviet Union and Finno-Soviet trade, the restrictions on foreign investment were finally demolished in 1993. Finland joined the EU in 1995 and, as the only Nordic country, the European Monetary Union. Soon after, Nokia’s global focus strategy kicked in and the economy picked up.

Between 1980 and 2004, Finland’s inward FDI stocks soared from just $540m to $30.1bn. Concurrently, inward FDI as a percentage of GDP grew from just 1.0% to 30.1%. However, Finland’s outward FDI grew even faster, from 1.4% to 43.5%. Investment has left the country faster than it has poured in. Despite its top position in competitiveness and innovation rankings, Finland ranks only 43rd worldwide in the United Nations Conference on Trade and Development inward FDI performance index.

“Unlike most Finnish companies, we wanted to invest in Finland,” says the CEO of a small business that was recently rewarded for its export performance. “To our great surprise, the Finnish bankers had few problems supporting investments in China and India, but were quite sceptical of investments in Finland.”

With growth projections exceeding 4% in 2006 and elections due in spring 2007, structural challenges that should be addressed – such as rigid labour markets (unionisation rate exceeds 80%), the high number of state-owned enterprises, relatively high individual taxation and the low degree of internationalisation (foreign citizens comprised less than 2% of total population) – are easily ignored. Yet, these challenges are now working against economic growth, which is vital to sustain the welfare state.

Attractive features

On the surface, Finland’s recent competitive and innovative performance has been so solid that it would appear irrational not to invest in the country. In addition to being one of the world’s most competitive economies, Finland ranks among the best in the development and use of information and communication technology (ICT), as well as environmental sustainability. In research and development spending per capita, it is number three worldwide.

As the least corrupt country in the world (Transparency International), Finland provides a strategic geographic position at the centre of northern Europe, between the high-income Nordic markets, the high-growth Baltic nations and Russia’s emerging economy. And, with a 26% corporate tax rate, Finland offers relatively competitive operating costs, at least in European terms. Also, Helsinki is ranked third after Paris and London for overall investment prospects in 2006. Mobile telecoms tariffs are among the lowest in advanced Europe. Despite the high degree of unionisation, labour costs are lower than in Germany.

During the past few years, the Finns have promoted investment opportunities, particularly in ICT, health care, forest industries and environmental technology and services. In the worldwide rivalry for foreign investment, their strengths derive from investments in knowledge and technology.

Since the late 1990s, Finnish firms have been attractive targets for asset-seeking multinationals, focusing on technology-based firms. Take, for instance, Wipro’s recent $32m acquisition of Saraware, a wireless network infrastructure provider. Additionally, foreign companies have located in Finland or increased their scale of activities to benefit from local centres of competence, especially in the key clusters.

In 2005, Nordic countries (Sweden and, to a lesser degree, Denmark) accounted for most of the 185 company acquisitions in Finland, along with the US, UK and Germany. In the next few years, the plans of foreign subsidiaries in Finland are regionally focused on Russia, the Baltic countries and eastern Europe.

World-class clusters

Of Finland’s world-class clusters, the most important has been the mobile cluster (read: Nokia). Today, the mobile giant is building new plants and developing R&D hubs in China, India and other major emerging economies. However, the key operations – Nokia headquarters and the Nokia Research Center and R&D labs (Espoo, Helsinki, Tampere and Jyvaskyla), the production centres of the Nokia Mobile Phones (Salo), as well as the Nokia-Siemens network facilities (Oulu) – remain in a handful of Finnish cities.

Indeed, Finnish prosperity is driven by a handful of clusters in mobile communications (Nokia), forestry (Stora Enso, UPM Kymmene and Metsaliitto), metals and engineering (Outokumpu, Rautaruukki, Kone and Metso), and chemicals (Kemira and Orion). These multinationals continue to invest and recruit, but primarily do so abroad. However, their leadership, key productive facilities and R&D continue to be located in Finland.

Since the early 1990s, the Finns have promoted ‘higher value-added’ as their secret of success. With increasing rivalry for inward FDI and the rise of China and India, these sources for attraction have grown highly competitive.

Most investment opportunities in Finland can be placed in two broad and partly overlapping categories:

• the investment opportunities promoted by Finnish government agencies during the past five to 10 years, particularly in ICT, health care, forest industries, and environmental technology and services;
• the opportunities offered by the world-class clusters of the Finnish economy, particularly forest industries, mobile communications, metal and engineering, and chemicals (including certain biotech niches).

Within these two categories, there are also narrower opportunities:

• The Finnish ‘innovation system’ comprises sets of actors – for example, centres of expertise, science parks and innovation centres – that are internationalising their strategies.
• Finland’s larger urban regions – not just Helsinki, but Tampere, Turku, Oulu and even Jyvaskyla – are increasingly seeking international opportunities.
• During the Cold War, Finnish industrial policy was heavily biased toward heavy industry, while seeking to avoid international (read: western) capital. Today, the impending liberalisation of services is expected to trigger new opportunities in a wide array of industries.
• The post-war era witnessed the rise of Finnish state-owned enterprises (SOEs). With or without privatisation, these SOEs are now increasingly seeking international investment capital.

Born global

In addition to large corporations, innovation agglomerations and urban regions, the Finnish economy is driven by SMEs. As Finland’s world-class clusters are globalising, the SME contractors of the Finnish multinationals are trying to follow in their footprints abroad, and diversifying into new business segments while seeking international capital. Since the late 1990s, the expansion of Nokia and the digital economy has stimulated the rise of ‘born globals’ – that is, relatively small enterprises that do not internationalise in stages, but seek international opportunities from day one. In Finnish venture capital, about 90% of the early-phase funding continues to originate from the public sector. In the long run, this is unsustainable and also provides new investment opportunities for international players.

As the promotion of Finnish FDI opportunities is taking off decades after comparable drives in other western European countries and amid an investment boom in transitional economies, the Finns are coping with relatively higher costs and lower benefits.

To informed investors, the status quo translates to excellent niche opportunities and attractive acquisition targets, often in the key clusters.

Dan Steinbock is ICT research director at the India, China and America Institute, chief of the New York City office of Finland’s Academy of Sciences, and the faculty spokesman of the Forum to Advance Mobile Experience of the CMO Council, which represents 2000 technology companies.