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Crisis-Exit: “Finnish Paradigm” Appeals To Slovenia     Print Email

Will the current slump end up producing “creative destruction” of the sort that has propelled capitalism forward in previous crises? The term was coined by Austrian economic historian Joseph Schumpeter to posit that the collapse of old structures can launch a new cycle in which economies arise again, phoenix-like, from their ashes. And, yes, it can offer a guideline for policy-makers seeking ways out of the current global economic predicament, according to Slovenia’s Finance Minister Franc Križanic.

Invoking this notion of crisis as an opportunity for economies to re-invent themselves, he cites Finland as a specific model of using recovery spending to develop innovative technologies. The Slovenian official laid out his thesis in a presentation to the European Institute on Oct. 7, stressing the precedent of Finland. That country fell into a sharp decline at the fall of the neighboring Soviet Union and then bounced back in the mid-1990’s with a cluster of high-tech companies including the world-class mobile phone and systems company, Nokia. This sectoral success, which led to strong overall Finnish growth, sprang from a bold program of refocused education and revved-up training centered on new technologies. This bold bet on the future, taken in an economic downturn, was described in a previous issue of European Affairs and the program has been treated as an exemplary case study by the Organization for Economic Co-operation and Development.

With its emphasis on innovation and technology, education and targeted investment, the Finnish program was spotlighted by Križanic as a potential economic model for Slovenia and other small countries to navigate into post-crisis prosperity -- and perhaps even “catch up with Old Europe.”  Slovenia needs to realize that it has the potential, he said, for a transformative economic process similar to Finland’s. In other words, it could become a new poster child of the “creative destruction” delineated by Austrian economist Joseph Schumpeter.  Similar ideas are being voiced in other small EU nations, notably Latvia.

Of course, Finland (like Slovenia) is a special case in the sense that both are small, relatively homogeneous societies with open economies. Although Finland’s model may work for smaller countries where social partnership and consensus are more readily achievable, the Finnish example is harder to apply to larger, heterogeneous European countries like Britain, France and Germany.

Despite these qualifications on his thesis, Minister Križanic makes a compelling case as to why his and other small countries could look to Finland for inspiration – and then ticks off the lessons to be learned. Finns have proven to be champion experimenters and innovators:  the crucial impetus behind Finland's transformation has been its commitment to research and development. Throughout the 1990’s Finland steadily and gradually increased government spending on R&D, while either cutting or freezing all other expenditures.

But that was an era of global boom. Today, can countries raise these budgets in a time of crisis? The answer seems to be a qualified “yes” – provided governments can muster the political will. According to 2008 Eurostat figures, Finland continues research and development spending at a rate of 3.73 percent of gross domestic product -- above the average for EU countries and of the United States (2.76 percent). Slovenia lags behind with a rate of only 1.66 percent. High R&D expenditure is possible in Finland because of a broad political and societal consensus, which Finnish leaders worked hard to put in place. Key to their successful strategy has been the investment of significant sums on scientific research, with a strong emphasis on adapting results for commercial purposes. That, in the Finns’ view, is the pre-condition of staying ahead intellectually and technologically – and economically. The breakthrough with the emergence of Nokia, when it came, perfectly fit the bill for Finland because the country had invested massively in modernizing its education system and thus produced a generation of IT engineers and technicians who could expand the mobile phone company’s position into global leadership and expand Finland’s performance in spin-offs throughout the whole sector.

In its own way, Slovenia, too, is a special case. The richest Slavic nation-state, with 91% of the EU average per capita, it is traditionally close to its regional trading partners, Austria and Germany. Slovenia is highly dependent on foreign trade, particularly exports to other European Union members, which comprise nearly two-thirds of Slovenia’s output.

Its special circumstances enabled Slovenia to become the first country to gain independence – without violence – after the breakup of Yugoslavia in 1991. It is among the earliest countries in the southeastern region of Europe to be admitted to the EU (in 2004) and the eurozone (in 2007). For the moment, Slovenia ranks as a “moderate” innovator, according to the European Innovation Scoreboard (EIS) in 2008, which placed the country just below the average of the EU’s 27 member states. More encouraging for the finance minister is the fact the Slovenia’s rate of improvement on this scoreboard rates slightly above the EU average.

Slovenia faces three main challenges in trying to embrace innovation as the engine to pull the country out of its crisis, the minister said:

The first of which is to maintain and possibly increase the current level of R&D investment in both the public and business sectors. Minister Križanic said that Slovenia will focus its R&D efforts most heavily on the pharmaceutical and machinery production. The country expects some other sectors to receive development financing from the European Investment Bank.

Slovenia’s investment of “venture” capital into the initial production phase of innovations is an area in particular need of improvement, according to Križanic He is proposing remedies in the form of measures that would cost 850 million € ( 2.4 percent of Slovenia's GDP). They include:

  • Subsidies for technology centers,  R&D and competitiveness (64.2 million €).

  • Increased allocations for the country's enterprise and risk-capital funds (87.7 million €).

  • Recapitalisation of its export-development bank (160 million €).

  • EIB loans for development investments in the automobile sector  (230 million €).

  • EIB loans for small business development investments (308 million €).

The second major challenge will be to improve the coordination and transparency of Slovenia’s innovation support network. A 2009 OECD Report identified a lack of systemic support for enterprises as one of the key deficiencies of the National Innovation System (NIS). In effect, the government will have to offer a clear framework that outlines the support offered, so that Slovene companies understand what RD&I opportunities are available for them to take advantage of.

Particularly in moments of radical change, Križanic warned, there is an ever-present threat of corruption that could potentially compromise the effectiveness of Slovenia’s R&D program. As part of improving its transparency, Slovenia will have to increase its efforts to monitor and combat corruption while promoting innovation, he said.

The Slovenian government has recently approved the working program of the Slovenian Technology Agency (TIA) in its efforts to foster technological development, innovation and technological entrepreneurship. The agency supports and stimulates the developmental endeavors of the business sector through financial aid for the technological development programs of firms, particularly those resulting from the clustering of companies and their cooperation and knowledge exchange with research institutions, both nationally and abroad. (www.tia.si)

The third obstacle is Slovenia’s relatively low innovation activity among small enterprises and the need to create measures and institutions designed specifically to improve the innovation activity of small firms. The lack of interest among small businesses in some industrial sectors for RD&I stems from the lack of competition and the lack of financial and human resources in sectors not traditionally considered suitable for innovation such as textiles and food processing.

The government is looking to provide tax allowances and other incentives for companies — in particular small businesses — that can take advantage of new knowledge and technologies. The technology agency said that small business can be an important engine of economic growth: to achieve this, small business needs to be connected to research and technological development, he said, citing possible links to technology centers, universities and public research institutions.

Latvia is another relatively small, homogeneous European country that can learn from Finland’s creativity and innovation. Latvia economic challenges are even more severe than Slovenia’s, but it also has some special advantages as part of the Nordic-Baltic community. Historically, even when it was part of the Soviet Union, Latvia has maintained and developed close trade ties to Finland. Now it receives substantial financial support from Finland and other Nordic countries through loans and investment.

At a recent Latvian-Finnish business forum in Riga, Latvian President Valdis Zatlers recognized Finland’s global lead in research and development as an example to Latvia. Finnish President Tarja Halonen also commented that the two countries would seek out new ways to increase cooperation in economic development and trade.

For the moment, Latvia is listed among the “catching-up countries” in terms of its innovation performance, according to the 2008 EIS. While the country shows signs of improvement in this area, it is still well below the EU average.

Latvia and Slovenia are alike in facing similar challenges in realizing their hopes of promoting innovation as the key to sustainable economic growth. Both countries recognize the need for a more small business development and greater venture capital. Both are struggling to increase or at least maintain public and private R&D expenditure, despite a substantial reduction of public expenditures in 2009. Both recognize that this is hard to do in a time of austerity. But both are small enough, with some robust and friendly neighbors, that they can find a breakthrough.

The overarching theme of the Minister Križanic’s presentation to EI was this: In order to remain competitive in the global economy, European countries must invest in education, research and development to further promote innovation. In seeking a way forward in Schumpeter’s thesis of creative destruction, Križani?’s view reflects a wider EU view, whose “innovation union” is the cornerstone of the European 2020 Strategy: the blueprint for sustainable economic development and growth. Indeed, the very fact that innovation has been enshrined as a central EU goal is further evidence that Schumpeter has had an enduring influence on EU policy makers -- perhaps even outliving the influence of John Maynard Keynes. The latter’s influence prevailed in the depression, but a new Europe may be ready to turn to a very different kind of medicine – at least in some smaller countries that can mobilize a strong national consensus about how to move ahead now.


Juliana Knapp is an Editorial Assistant at European Affairs.