Gerd Schienstock2 June 2008

Professor Gerd Schienstock

Research Unit for Science, Technology and Innovation Studies (TaSTI)

University of TampereFinland

Tel. +358 3 3551 7202Fax +358 3551 7265

Email: gerd.schienstock@uta.fi

Tampere1–12 June 2008

The Globelix Academy

The Industrial Development of Finland: From Path Dependency to Path Creation

Gerd Schienstock2 June 2008

Increasing interest in long-term technological development and socio-economic change 1/2

Position Aa) Industrialized countries have to undergo a fundamental

and very rapid transformation towards a new economy (knowledge-based economy)

b) Dictating influence of some mega-trends: globalization, pervasive informatization of the economy or scientific–technological revolution

c) Convergence in the development of industrialized economies

Position Ba) Continuity in economic development, change is slow and

gradualb) Countries retain patterns of institutional continuity and

national distinctiveness even under the conditions of external shocks

c) Divergence in the development of industrialized economies (path dependency)

Gerd Schienstock2 June 2008

Increasing interest in long-term technological development and socio-economic change 2/2

Finland

a) Fundamental and rapid transformation of the national economy towards a knowledge-based economy

b) Finland as a small and open economy is particularly exposed to external pressures

c) Finland has developed a unique model of the knowledge-based economy (ICT industry, social stability, ecological sustainability)

Gerd Schienstock2 June 2008

The concept of path dependency 1/2

• Continuity in the process of technological change

• New innovations line up with earlier technological change; they have historical antecedents of progress

• Mechanisms behind path dependency: technical interrelatedness, economies of scale; quasi irreversibility (high switching costs); increasing returns (positive feedback: learning); and social embeddedness of techno-economic processes

• Applied to analyse technological development but increasingly used on the organizational, sectoral, and even on the regional and national level

Gerd Schienstock2 June 2008

The concept of path dependency 2/2

• Path dependency on the national level means that national innovation systems develop and sustain particular technological, organizational, institutional and cultural characteristics

• Weak interpretation of path dependency (not technological determinism but social dimension): creative capability of actors; co-evolution of technological and organizational change; institutional embeddedness (learning within the existing growth path)

• Problem: a negative lock-in (inferior option of development: retarding economic growth); leading countries in the old paradigm are likely to fall behind due to structural, cognitive and political lock-ins

• Getting out of path dependency may become a key problem for industrialized countries

Gerd Schienstock2 June 2008

The concept of path creation 1/2

• Important integrating continuity and discontinuity: distinction between new technological paradigm and national technological trajectories (Dosi)

• Discontinuities in technological development and breakthrough innovations are associated with the emergence of a new technological paradigm

• Continuity is related to learning processes along a national technological trajectory as the dynamic aspect of technological paradigms

• Five building blocks to analyze processes of path creation:

1. window of new techno-organizational opportunities (new technological paradigm)

2. the prospect of new businesses and markets3. pressures coming from external socio-economic factors

(globalization)4. key change events (economic crisis, political instability)5. human will to change things (agency problem)

Gerd Schienstock2 June 2008

The concept of path creation 2/2

• The development of a new path, not a sudden break from the old one; new path interacts with the old paths and sectors, dynamic process of interaction (transformation of the old paths and shaping the developing new path: multitude of paths)

• Path creation as a contested terrain; confrontation between the forces of change and those of persistence, but also between different groups of modernizers

• Problem of “homing” the new paradigm: strengthening the diffusion capacity of an economy (demand factors)

Gerd Schienstock2 June 2008

Finland’s transformation process 1/2

• Path dependency was based on the forest cluster until the late 1980s; dynamic growth of the forest cluster with constantly widening exports after WW II

• Development of a new path became visible in the beginning of the 1990s

• Lock-in: inefficient use of capital and labour in the forest cluster indicated by comparatively low productivity and efficiency, shrinking global competitiveness in the 1980s

• Deep economic crisis: industrial production shrank by about 10 per cent, GDP shrank by about 20 per cent, unemployment close to 20 per cent other causing factors: breakdown of the Soviet Union, economic slowdown worldwide, inefficient macro-economic management

Gerd Schienstock2 June 2008

Finland’s transformation process 2/2

• New technological paradigm: digital, mobile paradigm in ICT, huge innovation potential

• Global pressures: Finland as a small open economy is particularly pressured by global competition forces

• New markets: creation of a common Nordic market through the establishment of the NMT (Nordic Mobil Telephone) Standard

• Agents of change: business people, scientific community, and policy makers (national project)

• Conflict between traditional industries and emerging telecommunication sector

• “Homing”: diffusion of ICT within the whole economy and society

Gerd Schienstock2 June 2008

Key characteristics of the old and the new Finnish Growth Model 1/3

Phase of path-dependenteconomic development

Phase of creation of a new growth path

Domination of the forest cluster (resource-based)

Development of the ICT cluster (knowledge-based)

Adaptation of the forest cluster (knowledge-based)

Concentration of expertise

Wood growing, harvesting and processing, engineering, chemicals

Electronics (telecommunications)

Biotechnology (liquefied wood and electronics (e-printing)

Output Material goods (wood, pulp, paper)

Material (mobile phones, networks) and immaterial goods (software, content)

Increasing importance of immaterial goods

Firm structure Greater number of medium-sized companies

One global player, network of SMEs

Few global players, network of SMEs

Competition Price and quality competition, geographical proximity, competition but also knowledge flows

Global (innovation) competition

Global competition

Gerd Schienstock2 June 2008

Key characteristics of the old and the new Finnish growth model 2/3

Sourcing National suppliers (small farmers as forest owners)

Global sourcing Global sourcing

Supplying external markets

Exports Global production Global production

Production system Large scale production, technology-based production system, bureaucratic control structure but responsible autonomy on shop-floor

ICT-based internal and external networks, focus on high value added functions

Increased techno-organizational flexibility, increasing focus on high value added functions

Management philosophy

Social partnership American management principles: shareholder value

American management principles: shareholder value

Core groups of employees

Skilled and semi-skilled employees

Highly educated engineers (knowledge workers)

Highly educated engineers (knowledge workers)

Research and development

Little R&D investment in core companies, higher R&D investment in supplier firms

High R&D investment, innovation networks (partly outsourcing of R&D)

Increasing R&D investment in core companies

Type of innovation Primarily process innovations, incremental product innovations

Radical product, process, organizational, and service innovations

Increased radical product and service innovations

Gerd Schienstock2 June 2008

Key characteristics of the old and the new Finnish growth model 3/3

State influence Interventionist state, centralized steering (large national programmes), short-term macro-economic policy

Supportive state, long-term, firm-centred innovation-enabling policy, discursive co-ordination (Science and Technology Policy Council), policy networks

Financial system National banks and major shareholders, long-term credits, patient capital (insider system), little venture capital

Foreign ownership, global credit and capital markets, impatient capital (outsider system), rapidly growing (private) venture capital

Science–industry relations

Science as independent social system, little co-operation between the two spheres, science universities, academic traditionalist doctrine

Science as part of the innovation system, close co-operation between science and industry, networked universities, partly entrepreneurial universities

Education system Secondary institutional education

Tertiary education, technology-oriented polytechnics

Culture Trust in the efficiency of centralized planning, inward orientation

Trust in the efficiency of markets and competition, outward orientation

Society Support from core groups in the society

Decreasing dependency on Finnish society

Gerd Schienstock2 June 2008

Characteristics of the Finnish technology and innovation policy

• Transformative: initiating and sustaining structural change (from a resource-based towards knowledge-based economy)

• High road strategy (knowledge-based economy)• Holistic restructuring approach (national systems of

innovation)• Anticipatory institutional change: prepare for

technological breakthrough (education and science)• Consensus-based (discourse co-ordination)• Reflexive learning (based on fixed goals, for example, R&D

investments, competitive benchmarking to identify weaknesses, culture of evaluation)

• Demand orientation• Increasing importance of social innovations:

organizational forms, networking and institutional adaptation

• Socially integrative (Nordic welfare state)• Internationalization: becoming a key hub in global

knowledge flows and networks

Gerd Schienstock2 June 2008

Is the new Finnish path sustainable?

Finland as a knowledge-based economy in the making

Problems concerning economic sustainability:• Dependency on one sector: telecommunications,

extension of the knowledge-based economy to other sectors: increasing knowledge-intensity of resource-based economy; establishing new sectors: bio-technology, trans-sector co-operation

• In the telecommunications cluster equipment production is still dominating; increasing focus on software and content production

• Dominance of one global firm (Nokia) (exit option), growing ICT network, institutional embeddedness

• Continuous industrial restructuring in the ICT sector and fusion of technologies can easily undermine Nokia’s position, new strong competitors (Microsoft, Vodafone, Apple, etc.)

Gerd Schienstock2 June 2008

• Linkages between the knowledge-based economy and the welfare state: the two-thirds society, independent of each other, mutually reinforcing each other (Finland: job creation in the ICT sector and reduced unemployment, differences between rich and poor people have increased, social services have been reduced to some extent but the traditional Nordic welfare state has survived

Is the new Finnish path sustainable?

Social sustainability