Jari Hyvärinen: Will Government spending cuts offshore corporate innovation activities from Finland?

6/9/2015

Most industrial production has offshored from Finland. It remains to be seen whether large companies also decide to move their research, development and innovation activities closer to production and customers in the near future. This would make it difficult for graduates to find jobs in Finland and hamper the entry of SMEs onto the global market via large companies' networks.

Innovation environments are competing for the best experts on a global scale. In Finland, public funding for private-sector R&D is low by international comparisons. Relative to gross domestic product, Finnish public funding for research, development and innovation is less than a quarter of that of the US and half the EU average,

Public R&D and innovation funding is in fact profitable for society as a whole. There are two reasons for this. Public investment in research and development and other measures which boost the innovation environment have a widespread, positive impact on society called as spillovers. Secondly, RDI in Finland compares favourably in a global context with countries that put many times more money into the same activity.

The funding situation for Finnish innovation is alarming at the moment, because both private and public R&D investment have been cut recently. In the difficult economic situation, savings have been made in Government R&D expenditure, unlike in the 1990s recession when growth was sought by increasing public R&D funding. This provided Finland with the basis for intense, innovation-led growth.

The corporate sector's own R&D investments have decreased in real terms since 2009. Future cuts to Tekes' innovation funding will further undermine the renewal of the national economy and innovation-led growth.

Thousands of examples from years gone by demonstrate that rewening corporate funding has a major effect on the growth and success of companies. Tekes-funded SMEs have increased their turnover and exports and created more new jobs than their counterparts. Innovation activities will play an increasingly important role in turning round the Finnish economy.

Large companies are responsible for a significant proportion of Finland's research and development, develop competencies and generate radical innovations. Only a fraction of Tekes funding for large companies remains with the company itself. In 2014, almost 90 per cent of the large company funding was channelled to SMEs, higher education institutions and research organisations. Cuts to innovation funding will thus indirectly affect SMEs and research, even if Tekes targets the cuts at the funding of large companies.

Of the various types of business support, which totals around 5 billion euros in Finland, numerous studies have found that support targeted at R&D and innovations has a high impact, is effective and helps to renew the economic base.

Tax subsidies, on the other hand, have proven inefficient because they involve no incentive impacts on companies. Businesses will only invest the amount of the tax subsidy rather than increasing their own investments, since such subsidies are taken for granted and require no effort from the recipient. Traffic and energy support are tax subsidies that put a brake on structural change.

I agree with Vesa Vihriälä of ETLA, the Research Institute of the Finnish Economy, when he calls for fewer cuts to Tekes' RDI subsidies. Instead, cuts should be targeted at inefficient business subsidies. In fact, the impacts of the cuts should form the basis of their targeting: subsidies that best promote the renewal of the economy, business and industry while improving productivity and boosting economic growth should remain. This would be the wisest approach to economic and innovation policy and in the best interests of Finland.

Jari Hyvärinen

The author, who holds a Ph.D. in Economics, is a Senior Adviser and economist at Tekes where he is responsible for assessing the impacts of innovation activities

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