washingtonpost.com
Innovation Gives Finland A Firm Grasp on Its Future
Economy Offers a New Model for Old Europe

By Robert G. Kaiser
Washington Post Staff Writer
Thursday, July 14, 2005

HELSINKI -- The political and economic malaise that afflicts so much of Europe this summer has not infected this northernmost outpost of the European Union. The contrast between Finland's optimism about the future and Old Europe's gloom is striking.

While France, the Netherlands, Italy, Germany and others are stumbling, Finland prospers, both economically and psychologically. The recent "no" votes in France and the Netherlands that undermined, perhaps fatally, the E.U.'s proposed constitution have produced a pervasive despair in much of Europe that did not turn up in recent interviews with scores of Finns.

"The Finnish model could offer some elements of a way out of the European crisis," said Pekka Himanen, a 31-year-old philosopher and co-author of a much-discussed book about Finland's successes.

Not that Finns have all the answers. Like all Europeans, they are producing too few babies to pay the promised welfare-state benefits to an ever-growing contingent of senior citizens. The new jobs created by their high-tech successes have been matched by losses from low-tech plant closures, so unemployment remains high -- about 10 percent.

Nevertheless, the Finns know they are much better placed now than many of their Old Europe neighbors to the south. Exploiting their small size (5.2 million people) and ethnic homogeneity, the Finns have proven themselves successful experimenters and innovators.

Fifteen years ago, Finland faced a full-scale depression, brought on by the loss of the country's most important markets as the Soviet Union disintegrated. Unemployment soared to 20 percent. But the Finns took control of their future, made painful adjustments and came out of the crisis with an economy that the World Economic Forum in Davos, Switzerland, ranks as the most competitive in the world.

The major economies of the E.U. are growing too slowly -- and their elderly populations are growing too quickly -- to preserve the traditional welfare state and provide adequate jobs today, or to offer the prospect of genuine competitiveness in the global economy tomorrow, many Europeans agree. In this view, the countries invest too little in education, research and development and do too little innovating. But there is no consensus on a course of action to fix these problems. Many people worry about preserving a social system that is rich in benefits for all.

"Right now," said Himanen, the young Finnish intellectual, "Europe is like a once-fit top athlete who has fallen out of shape. Instead of taking action, the athlete keeps writing new strategic plans on how to get back into shape: 'I could go running, I could go swimming,' and so on. Sometimes it feels that the European logic is: 'When I'm in better shape, I will start exercising.' "

But "it was actions and not words that created the Finnish model," Himanen added.

Those actions reflected a pragmatic spirit typical of Finland in its brief history as an independent country (Russian control ended in 1917). A relatively backward agricultural country became a high-tech powerhouse with labor productivity as good or better than that in the United States, but also a welfare state as generous as any in Europe.

Perhaps the most revealing statistic behind this transformation is Finland's commitment to research and development. The Finns put 3.5 percent of their domestic product into R&D last year, second in the world to Sweden (about 4.3 percent) and far ahead of the United States (about 2.6 percent) or the E.U. as a whole (less than 2 percent).

R&D expenditures symbolize the Finnish resolve to preserve a comfortable place in a globalized world for an underpopulated nation with thousands of lakes and billions of trees. Typically, the decision to spend so much on scientific research and the adaptation of its results to commercial purposes was the result of a broad political consensus. Finland steadily increased government spending on R&D throughout the 1990s, when all other spending was either cut or frozen.

Three Finnish institutions channel this money. One is a unique body called Tekes, the national technology agency. It supports both basic and applied research, granting about 40 percent of its funds to universities and other research institutions and 60 percent to businesses.

This year, according to Veli-Pekka Saarnivaara, the president of Tekes, the organization will give out nearly $540 million, or more than $10,000 for each Finnish citizen. A U.S. agency investing a comparable amount per capita would put $300 billion a year into American R&D.

Tekes is an entirely autonomous agency funded by the Finnish government. This "quite special" arrangement, as Saarnivaara put it, reflects one factor that sets Finland apart from many other industrial democracies -- Finns trust their government. Visitors from other countries who express admiration for Tekes tell Saarnivaara that such an operation would be impossible in their countries "because of the corruption," he said in an interview here.

The second source of the agency's independence is its reputation as a wise and discreet investor. For 20 years, Saarnivaara said, the agency has worked closely with private firms, helping them decide where to place their R&D bets, working collaboratively to identify markets and products, persuading Finnish universities and research organizations to collaborate with business.

"We are helping to plan R&D projects that we will then fund," he said. About a third of the projects Tekes funds fail completely, Saarnivaara said. He would like that percentage to be higher -- in other words, he would like to take more risks.

A second Finnish institution that supports the research and development efforts is Sitra, the Finnish National Fund for Research and Development, founded in 1967. Its budget is just a tenth that of Tekes, but its impact on Finnish business has been enormous. It acts as a venture capitalist, investing money earned by its own $750 million endowment in the start-ups and new ventures of established companies.

Sitra is run by Esko Aho, who was Finland's prime minister during the crisis years of the early 1990s and was nearly elected president in 2000.

Sitra's endowment came largely from a block of shares in Nokia that the government acquired in return for its support of the company's cell phone enterprise when it was in its infancy. Nokia was "a miracle," as Aho put it in an interview.

Since making a major commitment to telecommunications in the early 1990s, Nokia (a Sitra client itself) has grown into the world's leading cell phone maker. Its $35 billion in annual sales drives the Finnish economy.

Sitra, too, is politically autonomous. Revealingly, more than 90 percent of the companies in which Sitra has invested were previously supported by Tekes, an example of how Finland has become what Himanen and his co-author, Manuel Castells, a Spanish-born sociologist, call "a network society."

A third important source of R&D funding is the Finnish Academy of Science and Letters. Until Reijo Vihko became its president in 1996, it was a clubby organization that channeled research funds to established scientists and labs without much regard for how good they were. Vihko, a former medical professor, turned the academy upside down, according to several Finnish scientists.

"The main point was to concentrate on centers of excellence," Vihko said in an interview. That meant giving money to the best scientists with the most promising projects and cutting off others whose work wasn't getting anywhere. Many of the latter were prominent people with good connections in government and the news media, Vihko said. They orchestrated a lot of criticism of his changes.

Sirpa Jalkanen, director of the MediCity Research Laboratory at Turku University and one of 26 "professors of the academy" in the country, a title reserved for the finest scholars, said Vihko's reforms brought an entirely new spirit to Finnish science. "There's a lot of enthusiasm, much more money," she said. The academy and other funders of basic research "are really supporting science at an international level."

Vihko's victims -- many of them prominent older members of the scientific community -- were furious, she said, but "Reijo is a person who is afraid of no one." In a lesson for Old Europeans who contemplate undertaking comparable reforms in their societies, Jalkanen said she learned from watching Vihko that proponents of fundamental change "get so much opposition, you have to be very strong and really believe in what you are doing."

The Finnish Academy now provides about $240 million annually for basic science in Finland.

Funding from public institutions constitutes only about a third of R&D expenditures; the rest comes from businesses. This, according to numerous Finnish business leaders, reflects the consensus in society that only by staying ahead intellectually and technologically can Finland hope to sustain its standing as one of the world's most successful countries.

Finland's ability to perform with the best in the world also depends on its educational system, widely recognized as the finest in Europe. It, too, was reformed under the leadership of one forceful personality, Erkki Aho, supported by key political leaders and, ultimately, a strong consensus in the society. Aho, now 68 and retired, was director general of the Finnish National Board of Education.

Finns are proud of their accomplishments over the last generation, when their country largely reinvented itself. But with characteristic modesty, they shy away from a visitor's suggestion that Old Europe can learn from their example. "Italians aren't linear thinkers like us," observed Finland's ambassador to the United States, Jukka Valtasaari, interviewed in Washington, "and the French are a melting-pot country" far different than the homogeneous Finns.

But a bigger difference may be the Finns' willingness to change. Today, Finns talk nervously about whether the country can reinvent itself once again in the next 30 years or so. Some fear complacency. "The perception is we don't have to change right now," said Risto Siilasmaa, 39, president of an Internet security firm called F-Secure that he founded in 1988.

Esko Aho, the former prime minister, said he is worried that "people are so satisfied with the present. We can turn out like France and Germany today if we aren't careful. We have to wake up now before it is too late. It's time to rethink our national strategy again."

Staff researcher Robert Thomason in Washington contributed to this report.

© 2005 The Washington Post Company