Jussi Kajala: What happens when companies go bankrupt?


In recent years we have benefited from a better entrepreneurial culture in Finland, and have started to accept failures and increased our tolerance of risk. The new generation is setting up promising businesses such as Venuu, Ovelin, and Nordic Business Forum in an encouraging environment.

In the current economic situation, the risks of setting up a business are a cause for concern for both entrepreneurs and their stakeholders. As a high-risk funder, Tekes also has an interest in whether or not Finnish companies are encouraged to take the right kinds of risks. Tempo Economics, a research and assessment consultancy, is currently studying Tekes customer companies whose activities have been shut down in the 21st century. The study examines what happens to the personnel, know-how, and customer relationships of these companies – that is, to intangible capital - after the activities of the company have ceased.

In last year 67 companies funded by Tekes went bankrupt. Comparing this to the total number of organizations funded by Tekes, we have about 5,000 customers each year who have either received funding from us in the past five years, or who are still paying back a loan from Tekes. This means that about 1 per cent of our customer base goes bankrupt.

The first phase of the study by Tempo Economics involved telephone interviews with representatives of 200 companies that had shut down their operations. About 140 of those interviewed had worked in a company whose operations had finished because of a bankruptcy. Other reasons for ceasing operations included mergers, acquisitions, re-organizations as well as controlled shutdowns.

Most of the interviewees – about 60 per cent – felt that Tekes funding was a significant and even a decisive factor in the company's product development. So we are dealing with a group of companies into which Tekes has invested heavily.

The impact of the bankruptcies on (un)employment is surprising: Of the respondents to the survey only a small portion (13%) report that the key personnel in the company had become unemployed after the end of operations. In fact, respondents felt that the competence of the employees as well as the companies' managers developed considerably in running the business. The personnel's knowhow has been utilised further and even sought after in other companies.

According to the respondents, a majority of personnel (83%) had stayed in Finland. Northern Europe was the main foreign destination for work.

In about half of all cases (46%) the results of the product development were utilised in other companies. However, the respondents emphasized that the development of employees' knowledge and skills in connection with product development work is a significant factor, whose benefits in other companies and organisations is hard to evaluate.

Considering different industries, the ICT industry stands out as a positive example. In the ICT industry human resources stay in the same field, and business activities are more dynamic, experimental, and in many cases of shorter duration than in other areas. In the IT field, activities often resemble projects; within a short time competence is utilised in new projects in new companies.

Those who have invested in a company can suffer serious economic losses in the case of a bankruptcy. These losses seem to be very harsh, if we compare them against the benefit provided by entrepreneurs to the society. Based on the results of this study, it seems that companies which go bankrupt do not cause unemployment. It is likewise a good sign that 46 per cent of the results of product development work are not packed away in a drawer.

Failure should not be the aim or a goal to be encouraged, but incentives for risk-taking must be set in correct proportion to the drawbacks of bankruptcy. As we continue the development of the entrepreneurial culture in Finland, we must remember that bankruptcy does not mean the disappearance of skills or innovation. In my view, the personal risk in entrepreneurship is still too great when compared to the benefits to the society. The mission of boosting entrepreneurial culture and risk-taking in Finland remains yet unfinished.

Jussi Kajala
Senior Adviser
Impact Assessment

Results of the study by Tempo Economics (link to PDF file, unfortunately only in Finnish).

The study will be completed by the end of 2014. The final results will be published on the Tekes website. The main results will also be published in English.

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