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What’s next for Finland? : a broad inquiry into strengths and weaknesses of the economy of Finland

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Title: What’s next for Finland? : a broad inquiry into strengths and weaknesses of the economy of Finland
Author(s): Perttula, Paavo
Contributor: University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies (2010-2017)
Discipline: Economics
Language: English
Acceptance year: 2020
Finnish economy performed remarkably well for decades after the war. Finland achieved an enviable standard of living with a combination of free-market capitalism and extensive welfare state. The long period of growth, which was temporarily disrupted by the 1990s depression, culminated in the spectacular rise of Nokia that pushed the entire country forward. Eventually the period of growth ended in global financial crisis of 2007-2008. While Finland’s neighbors were able to bounce back in few years, it took a decade for Finland to recover, and the effects of the prolonged recovery are felt yet today. This dissertation focusses on identifying the underlying reasons to Finland’s poor performance in recent years. The research question in this dissertation is broad: to identify significant trends and phenomena that cross sector boundaries and cannot be described by a single model and a narrow approach. The approach is to systematically review well established theories, sector by sector, and then present cross-country evidence to shed light on Finland’s economy. A lot of emphasize is on Schumpeterian endogenous growth theory, which explains why firms invest in research and development. Schumpeterian theory is tested with a panel data regression, using sector-level Product Market Competition data and data on triadic patent presentations. Data used in this dissertation is collected from public sources, including Statistics Finland, Eurostat, OECD, UN, ILO, WIPO and The World Bank. A Statistically significant and positive relationship between PMC and rate of innovation was found to exist using Finnish data for 2013 and 2017. As PMC has declined in key industries in Finland, it means that firms’ incentives to innovate have decreased. This coincides with austerity measures that have impacted public sector R&D spending. These factors, among with others, have contributed to Total Factor Productivity decline, which is worrisome. Other notable findings include Finland’s post-crisis growth in private demand, that substantially contributed to Finland’s recovery. However, much of that growth comes from spending on housing, water, electricity, gas and other fuels, that is related to steep increase in electricity transmission tariffs. In other words, increased spending reduced welfare. As overall conclusion, Finland needs a more strategic approach to economic policy. Finland would benefit from focusing on policies that spur innovation and generate growth, namely, stronger focus on market economy and R&D. Deregulation, supporting the market economy, and lowering the obstacles that stand in the way of immigration of skilled workers, are examples of those policies.
Keyword(s): Finland’s economy Schumpeterian growth theory Product market competition R&D Labor productivity Total factor productivity Consumption theory Foreign trade talouskasvu makrotaloustiede työmarkkinat ulkomaankauppa luovatuho innovaatiot innovaatiopolitiikka tuotemarkkinakilpailu ulkomaankauppa kokonaistuottavuus hyvinvointi

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