Sustainable growth requires not only RDI investments, but also an efficient RDI system, more skills and smart capital

Finland’s economic growth has fallen clearly behind its peers and there is a risk that the gap will widen further. The main problems are low scalability of innovations and slow productivity growth, according to the final report of the expert working group led by Pekka Ala-Pietilä, which was submitted to Minister of Economic Affairs Mika Lintilä on 6 May 2022.

In June 2020, Minister Lintilä appointed an independent expert group to support businesses in overcoming the challenges posed by the coronavirus pandemic. The work focused on investigating why Finland has not been able to make use of its good foundation in the past ten years to create economic growth that would ensure the wellbeing of the society. The final report proposes measures for the next government term of 2023−2027.

“The final report includes proposals for measures to ensure sustainable growth in Finland. These include raising the level of R&D investment to 4% of GDP, improving the efficiency of the innovation system, ensuring the adequacy of skilled workers and competence, increasing the level of smart capital capable of risk-taking, and safeguarding an encouraging investment environment,” Ala-Pietilä says.

“The willingness of foreign and domestic operators to invest in Finland must be strengthened. We must also ensure that the operating environment of companies is competitive, encouraging and predictable, and that there is sufficient amount of skills and skilled workers.  These measures will also make smart capital more attractive,” Minister of Economic Affairs Lintilä says. 

Growth policy resources must be secured and the RDI system made more efficient

In Finland, R&D investment vital to innovation has fallen short of that in peer countries. To respond to this challenge, the work of the parliamentary RDI working group has resulted in an exceptionally broad political support for raising R&D investment. 

It is essential that priority be given to the decided R&D expenditure, regardless of economic fluctuations and other needs. The benefits of public R&D funding in improving productivity depend on the efficient allocation of innovation investments, ability to leverage private R&D activities, and the ability of companies to turn innovations into production in Finland through investments. Fulfilling these conditions will make it easier to reconcile different expenditure needs with responsible management of public finances.

The key weaknesses of the innovation system are related to the lack of predictability, absence of radical investments and applied research, and the silo-like operating model of the system. In addition, expertise cannot be transferred to companies for their use well enough. An efficient use of increased R&D funding also requires a great deal of work. 

According to the report, strategic and operational targets must be set for the functioning of the innovation system. RDI funding should also follow the five key criteria of quality, effectiveness, capacity for renewal, internationality and competitiveness. The increased funding must be allocated to the different stages of RDI activities in a balanced way. 

In the next few years, special emphasis should be placed on grant-based funding for business-oriented applied research. More investments and long-term commitment are also needed in developing ecosystems important for sustainable growth.

Adequacy of skills and skilled workers must be ensured 

A shortage of skilled labour is a significant bottleneck for Finland’s economic growth and productivity development. It is critical to increase domestic expertise and improve the availability of foreign labour. Among other things, the report proposes more educational resources for sectors and regions that are essential for sustainable growth. In addition, more study places should be allocated to first-time applicants. According to the working group, the funding base of higher education institutions should be expanded by introducing carefully prepared tuition fees.

The interim report of the working group published in February 2021 proposed a number of measures to increase the availability of international experts. While progress has been made, it has not been sufficient to meet the targets. The working group stresses the importance of effective implementation of the measures with emphasis on the following: defining the economic policy vision to attract talent, enhancing the implementation of work-based immigration, establishing the Work in Finland operations and allocating sufficient resources to them.

Sustainable growth requires an encouraging environment and capital capable of risk-taking

The volume of capital investments is on the rise. Despite this, Finnish growth companies in the later growth stage suffer from a shortage of domestic capital. There should be more domestic investors and the amount of capital should be increased in ways that motivate both state and private capital. At the same time, more foreign capital is needed for the financing and internationalisation of companies. The business environment has a major impact on how much both Finnish and international investors want to invest in Finland. 

Regulation must be transparent and taxation predictable and competitive compared to key reference countries. The working group proposes that a separate report be drawn up on Finland’s tax competitiveness in relation to key peers such as Sweden, with the perspective of attracting smart capital.

All sections of the report, i.e. raising the level of research and development investments, improving the efficiency of the innovation system, ensuring the adequacy of skills and skilled workers, and increasing the amount of smart capital, will promote the competitiveness of our investment environment and help companies make industrial investment decisions. In addition to these, a well-functioning labour market plays an important role in making the investment environment attractive. Finally, the central government should pay attention to the way permit processes function and the effect of its measures on Finland’s attractiveness as an investment location. 

Inquiries:
Mari Kokko, Special Adviser to Minister of Economic Affairs, tel. +358 40 521 2124
Sampsa Nissinen, Senior Ministerial Adviser, Ministry of Economic Affairs and Employment, tel. +358 29 50 47189
For requests for interviews with Pekka Ala-Pietilä (the chair of working group), Leea Tanner, tel. +358 40 754 9938