Professor Charles Sabel from Columbia Law School and Professor AnnaLee Saxenian from UC Berkeley argue in their book A Fugitive Success that Finland is quickly becoming a victim of its own success. In recent decades Finnish firms in the forest products and telecommunications industries have become world leaders. But the kind of discipline that made this success possible, and the public policies that furthered it, is unlikely to secure it in the future. Efficiency improvements and incremental A Fugitive Success innovations along the current business trajectory will gradually lead these industries into a dead-end unless they use innovation as a vehicle for transforming themselves into new higher value businesses. Saxenian and Sabel raise some serious concerns about the readiness of these industries, and the Finnish innovation system as a whole, for the needed transformation. A Fugitive Success is required reading for A Fugitive Success those involved in the development of the Finnish innovation environment and Finland’s Economic Future implementing the new national innovation strategy. Charles Sabel and AnnaLee Saxenian Sitra Reports 80 Sitra Reports the Finnish Innovation Fund ISBN 978-951-563-639-3 Itämerentori 2, P.O. Box 160, FI-00181 Helsinki, Finland, www.sitra.fi/en ISSN 1457-5728 80 Telephone +358 9 618 991, fax +358 9 645 072 URL: http://www.sitra.fi A Fugitive Success Finland’s Economic Future Sitra Reports 80 A Fugitive Success Finland’s Economic Future Charles Sabel AnnaLee Saxenian Sitra • HelSinki 3 Sitra Reports 80 Layout: Sisko Honkala Cover picture: Shutterstock © Sabel, Saxenian and Sitra ISBN 978-951-563-638-6 (paperback) ISSN 1457-571X (paperback) ISBN 978-951-563-639-3 (URL:http://www.sitra.fi) ISSN 1457-5728 (URL:http://www.sitra.fi) The publications can be ordered from Sitra, tel. +358 9 618 991, e-mail [email protected] Edita Prima Ltd. Helsinki, 2008 Preface Finland’s competitiveness until today has been based on innovation and strong research & development. This strategy has indeed been very successful. In many international comparisons the competitiveness and innovativeness of Finland has been ranked among the top countries. However, our business environment is changing rapidly and radically. Value is quickly migrating from products to services, and new centers of innovation – particularly in Asia – are rising as we speak. The worldwide competition for innovation is dramatically intensifying. This calls for new approaches to innovation as well as great renewal capability from companies and nations. Incremental improvement and innovation does not suffice anymore. Instead, competitiveness is increasingly based on radical innovation, which is often achieved by combining different knowledge sources in a unique manner. In this new competitive game collaboration with multiple stakeholders is a must. As a result, the so called open innovation seems to be gaining ground over the traditional closed, in-house innovation. Traditionally, Finnish companies have been good at generating new knowledge and innovations by using their internal resources like own R&D – but how good are they in addressing the new innovation paradigm? This in mind, Sitra started in 2006 the Global Knowledge Transfer study with the title ”clusters in transition”. The starting point of the study was to analyze whether and how the new innovation paradigm challenges the traditional strong industrial clusters of Finland? The study was conducted by Professor AnnaLee Saxenian from UC Berkeley and Professor Charles Sabel from the Columbia Law School. Two clusters were selected as a focus, forest and ICT clusters because of their importance to Finnish economy. The study was based on interviews of representatives of these industries and available literature. According to the authors Finland is quickly becoming a victim of its own success. Efficiency improvement and incremental innovations along current 5 business trajectory will gradually lead these industries into a dead end unless they use innovation as a vehicle for transforming themselves to new higher value businesses. The crucial question for Finland is: are forest and telecom industries capable to transform their strategy and ways of working to meet the challenges of continuous renewal and ”radical innovation”. Saxenian and Sabel raise some serious concerns about the readiness of these industries and the Finnish innovation system as a whole for the needed transformation. As always with external analysis, there is place for critique and different views. However, as always in times of change, it is healthy – after so many glorifying reports – to listen to critical but constructive and well-grounded view from outside, in this case from two eminent researches. The timing of their contribution is ideal in terms of implementation of the new national innovation strategy. The report is also useful material for those who will evaluate the Finnish innovation system and its agencies. On the behalf of the Finnish Innovation Fund I would like to congratulate professors Saxenian and Sabel for their excellent report. We are grateful for their interests in Finland’s competitiveness. I would like also to thank director Antti Hautamäki for his initiative to conduct this study and for his help during the process. Helsinki, September 2008 Mikko Kosonen Executive president The Finnish Innovation Fund Sitra 6 Acknowledgments Finns talk to each incessantly – so often, and with such intensity, that it can be hard for outsiders to join the conversation, no matter how welcome they are made to feel. We are therefore indebted to Petri Vasara and his team at Pöyry Forest Industry Consulting Oy for connecting us to key actors in the forest products and ICT sectors, and especially appreciative of Petri’s efforts to keep us aware of what we might be misunderstanding. In the end we disagreed about how best to characterize Finland’s economic prospects. But Petri found a way to reconcile justifiable pride in his own judgment with respect for our dedication and integrity, and we are grateful to him for that as well. Kari Lilia was not officially part of our research team. Yet his influence and that of his collaborators in Finland and the wider group of the Nordic Translearn Project is so evident throughout that in some ways he might as well have been. We can’t thank them enough for their generosity, intellectual and personal. Mikko Kosonen – late of Nokia, now the Executive President of Sitra, and author, with Yves Doz of an important, very recent book and article on the strategic difficulties of platform leadership – was our last-minute sparring partner. The more detailed disagreements became, the more quickly we found our way past differences of language and nuance of conceptualization to agree on fundamentals – on characterize the strengths and weaknesses of the current situation, and how to frame further questions to answer the ones that must remain open for now. Last, but not least, we are most grateful to Director Antti Hautamaki at Sitra for his many contributions to a project that involved more cross-cultural coordination than any of us anticipated. Charles Sabel Columbia Law School, USA Annalee Saxenian University of California, School of Information, USA 7 Contents 1 Introduction 13 1.1 Good governance as a backstop? 19 1.2 Two views of growth and innovation 22 2 The forest products industry 27 2.1 The beginnings to WWII 30 2.2 Towards high-valued added products 38 2.3 Consolidation and its constraints 42 3 The information and communication technology sector 51 3.1 Early capability building: pre-1970 56 3.1.1 Decentralized telephone networks 56 3.1.2 An entrepreneurial radio-telephone industry 58 3.2 State-supported resource mobilization: 1970s and 1980s 60 3.2.1 Public investment and capability building 61 3.2.2 The rise of Nordic collaboration 63 9 3.2.3 Commercialization of technology 64 3.2.4 Nokia’s expansion 66 3.3 Consolidation and expansion: 1990–2000 67 3.3.1 The rise of the national system of innovation 68 3.3.2 Nokia’s recovery and breakthrough 71 3.4 A new global and competitive era, 2000–2008 74 3.4.1 Manufacturing mastery 75 3.4.2 Back to Finland 77 3.4.3 Back to Nokia 80 3.5 The big picture: competing interpretations 82 4 Two roads to the future? 87 4.1 Forest products 88 4.1.1 Urban mini mills 89 4.1.2 Bio-energy and bio-refining 90 4.1.3 Integrating forward from capital goods to services 93 4.1.4 Service platform of publisher and packagers 94 4.1.5 Blurring the distinction between new media and old: radio frequency identification tags (RFID), for example 95 4.2 ICT Scenarios 97 4.2.1 Mobile software and services 98 4.2.2 Mobile computing and mobile internet services 99 4.2.3 Mobile service platforms 101 4.2.4 Platforms for ubiquitous computing 102 4.3 The Varkaus scenario 103 10 5 The end of the national innovation system: A conclusion and the further thoughts on a new beginning 110 5.1 The political economy of the national innovation system 112 5.2 Rethinking the national innovation system? 118 5.3 What comes next? 121 Bibliography 123 11 1 Introduction Finland is at risk of becoming a victim of its economic success. In the last decades Finnish firms in the forest products and telecommunications industries have become world leaders. Together they account for 40 percent of the country’s exports and 8 percent of its GDP. They have achieved this by relentlessly refining the core technologies in their respective domains, and introducing them into successful products with the help of supply chains and marketing organizations whose discipline, flexibility, and efficiency are widely admired by their competitors. The development of the technologies central to this success has been supported by an ensemble of public research facilities which are equally widely admired.