When Small States Make Big Leaps: Institutional Innovation and High-Tech Competition in Western Europe

3. From Price-Fixing Cartels to Research Consortia: Rapid Restructuring in Finland

55 3 FROM PRICE-FIXING CARTELS TO RESEARCH CONSORTIA Rapid Restructuring in Finland In the 1970s, Finland was one of Europe’s least innovative countries. By the end of the 1990s, it was a high-tech leader. What caused this transformation? Increasing dependence on the Soviet Union, an acute economic crisis, and external EU-imposed constraints discredited established stakeholders and traditional policy routines. In this environment, policymakers threatened to promote restructuring by dismantling hitherto core instruments such as the universal bank, the state-owned enterprise and credit rationing. At the same time, unilateral liberal reform was politically costly, precipitating fierce resistance by societal actors , most notably trade unions. Policymakers thus sought to promote economic adjustment by very different means, adapting neo-corporatist institutions to identify and invest in disruptive new inputs. Industry embraced these measures because they had a long history of interfirm and private-public coordination. Policymakers experimented with a wide array of initiatives, but creative corporatism was most pronounced in R & D, where policymakers could convert a history of constructive collaboration within national projects, banking blocs, and price-fixing cartels. Here, policymakers struck a series of peak-level bipartite and tripartite deals to increase research expenditure, delegating implementation to private-public and interfirm research consortia. Research collaboration was complemented by more modest initiatives aimed at small and medium-sized enterprises, including efforts to engage new stakeholders such as pension funds in early stage risk capital. Creative corporatist bargaining was most limited in labor markets, because industry did not have a strong tradition of cooperating 56 WHEN SMALL STATES MAKE BIG LEAPS with organized labor in production. To the extent that it occurred, human capital investment was shaped by bipartite state-industry cooperation in higher education . Trade union participation was limited to peak-level bargaining, in which unions ratified innovative policies as an alternative to more extensive labor market reform. Peak-level deals to invest in disruptive new inputs trigged a massive increase in public- and private-sector investment, as policymakers could use neo-corporatist institutions to build a consensus, monitor commitments, and coordinate activities. Total expenditure on R & D climbed from OECD-lagging levels during the 1970s to the second-highest in the world (after Israel) by 2009, and Finland observed significant, if slightly less dramatic, gains in early stage risk capital and human capital. Those new supply-side investments had very different implications for economic adjustment. Instead of modernizing established resource-extractive niches, these investments permitted movement into emerging industries such as biotechnology, software, and telecommunication equipment. Restructuring was most dramatic in telecommunications.R & D,human capital investment and early stage risk capital supported experimentation during the 1980s, permitted expansion during the 1990s, and facilitated adaptation in the wake of the dot-com crash. In sharp contrast to the situation with other hightech leaders such as Ireland, these new investments supported movement into high value-added, innovation-intensive activities. Finland was less affected by the large-scale offshoring of low-cost assembly operations in the wake of the dot-com crash, successfully shifting employment from hardware manufacturing into software development. As a result, Finland was less dependent on nontradable services than were other high-tech leaders, and it was less vulnerable to the financial crisis of 2007–9. While knowledge-intensive competition effectively immunized Finland to the financial crisis, it has also generated new challenges. Most significant, it has exposed the country to disruptive technological innovations, such as the convergence between mobile telephony and computing. The emergence of new competitors and the resulting shift in value from hardware to services has threatened Nokia’s dominant position in high-tech markets and the Finnish economy more generally. In fact, creative corporatism increased Finnish vulnerability by mobilizing resources around a handful of capital-intensive national-level research projects and by privileging formal R & D over nontechnological innovation. These challenges have precipitated a new round of institutional conversion, shifting attention to entrepreneurship and nontechnological innovation. FROM PRICE-FIXING CARTELS TO RESEARCH CONSORTIA 57 The Puzzle: From Paper Producer to High-Tech Leader Conservative corporatist bargains supported incremental upmarket movement in capital-intensive low- and medium-technology industries throughout the postwar period, with pulp and paper products alone representing over one third of Finnish exports as recently as 1970 (Koski and Ylä-Anttila 2006, 18). Finland avoided cost competition and increasing commodity prices during the 1970s, but only by increasing bilateral trade with the Soviet Union (Economist 2000, 21). The ensuing collapse of...