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How to improve global competitiveness in finnish business and industry tekes impact brief 3 2016

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How to improve global competitiveness in finnish business and industry tekes impact brief 3 2016

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Global success of Finnish business and economy requires strong home ecosystems and a strategic place in global value chains. Tekes has done and can do in the future to make Finnish companies globally competitive, meaning that the value created in Finland is captured in Finland and helps maintain a high standard of living, quality employment and social well-being.

Global success of Finnish business and economy requires strong home ecosystems and a strategic place in global value chains. Tekes has done and can do in the future to make Finnish companies globally competitive, meaning that the value created in Finland is captured in Finland and helps maintain a high standard of living, quality employment and social well-being.

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How to improve global competitiveness in finnish business and industry tekes impact brief 3 2016

  1. 1. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen Creating and capturing value for Finnish business and society Finnish global competitiveness ‘post- Nokia requires a more diverse economy Alasdair Reid - Vesa Salminen - Jelena Angelis - Elina Griniece - Kimmo Halme - Julien Ravet - David Regeczi Competitiveness is a concept that is used and abused: it is defined in a myriad of ways by economists; politicians promise to maintain ’national competitiveness and jobs’ while the media spin stories about the ups and downs of major firms. For the citizen, competitiveness may seem like a threatening idea when their job is ’on the line’ due to global market or technological trends. This study explored what Tekes has done and can do in the future to make Finnish companies ’globally competitive’, meaning that the value created in Finland is captured in Finland and helps maintain a high standard of living, quality employment and social well-being. Renewing the motors of the Finnish economy – business ecosystems Since 2009, Finnish companies had to cope with asymmetric shocks in the form of the loss of external demand for electronic and paper products, sectors that Finland in which Finland is strongly specialised. Compared to other European countries, Finnish value added is also much more concentrated in sectors related to the bioeconomy (forestry and logging, paper, wood); as well as residential care (social, health, etc.). Exports in electronics were particularly hit ‘post-Nokia’ and did not recover in the following years unlike other sectors. The Finnish economy is dependent on a few large companies and more generally has a weakly diversified export base. Such challenges are not unique to Finland and external shocks are unavoidable, however, maintaining global competitiveness depends on whether new business ecosystems are develop to replace declining industries and can position themselves rapidly in foreign markets. Several authors have drawn parallels with biological systems and proposed the concept of eco-system (e.g. start-up ecosystem). The study used Autio & Thomas (2014) definition of an innovation ecosystem as “a network of interconnected organisations, organised around a focal firm or a platform, and incorporating both production and use side participants, and focusing on the development of new value through innovation” In this respect, while there have been some positive trends especially in service (digital, etc.) sectors, turnover and employment in the manufacturing industry sector has dropped sharply. To date, despite their promise, the new emerging ecosystems have not been able to compensate the decreased exports (or jobs) of manufacturing. How to improve global competitiveness in Finnish business and industry? Brief No. 3/2016 Impact Brief
  2. 2. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen Finnish business success requires strong ‘home’ ecosystems and a strategic place in global value chains Local ecosystems, global reach - positioning Finnish businesses in global value chains A review of internal and external drivers and barriers to Finnish businesses competing in global markets was undertaken by the study. To examine these factors, the study developed an ‘open innovation system’ framework (see diagram below) to structure the analysis of key factors into ‘internal and external’ blocks. While Finnish policy-makers can intervene more or less directly to improve internal factors, it is much more difficult to exert an influence on global factors. The model was used to assess the overall Finnish competitiveness (macro-level) but also four specific ‘business ecosystems’. National economies and specific business ecosystems do not function in isolation, but are open to global pressures and interactions. In particular, technology upgrading is highly dependent on the extent to which key national businesses are positioned in global value chains (GVC). Similarly, involvement in international R&D networks can favour learning and adaptation. The ability of a country to attract foreign direct investment, particularly in knowledge intensive activities or key players in GVC, depends on how well it is able to foster new emerging high-value activities. The study argues that global competitiveness should not be measured (only) in terms of export growth but rather on the capacity to gain a strategic position in global value chains. This raises the question of the extent to which policy interventions lead to not only value creation but, in particular, ‘value capture’ in an economy.
  3. 3. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen Tekes support is focused on the bioeconomy, cleantech, digital and health priority areas Tekes impact on global competitiveness is positive but is a long- term investment Four motors of future Finnish competitiveness – long term policy focus on ‘BCHD’ Finnish competitiveness policy has focused on four areas since the mid-2000s: bioeconomy, cleantech, health and digitalisation. Tekes has dedicated significant investments to help develop business ecosystems in these four target areas. In terms of internal competitiveness factors, the study argues that three are particularly problematic: limited internal demand, economic/export structure and the regulatory/tax environment. In response, the direct interventions of Tekes are focused on the renewal and diversification of the economic structure through targeted programmes in the priority areas. Various Tekes programme seek to develop ‘upstream’ in the ‘policy value chain’ new ecosystems or foster new business models which can be tested nationally (by the relatively sophisticated Finnish consumer, government services, etc.), potentially stimulating demand for new products or services. The limited internal demand is addressed more directly through the internationalisation activities either embedded in specific Tekes programmes or as related downstream ‘policy value chain’ services of other Team Finland agencies. The assessment of external competitiveness factors underlined that Finnish businesses are particularly sensitive to external factors and shocks. The sectoral trade patterns (intermediate goods, declining trend in high-tech exports, etc.) means that external shocks due to global demand or global value chain repositioning can have particularly severe economic impacts. Another drag on competitiveness is that Finland performs, surprisingly, poorly in attracting foreign investment in high-value added or technology intensive (R&D functions, etc.) businesses or skilled individuals to pursue advanced studies or careers. In response to these issues, Tekes, and Team Finland partners, have given increasing emphasis to activities designed to anticipate such shocks, favour market access and rapid internationalisation and attract key foreign investments. The application of the ‘open innovation system’ model to analyse Finnish competitiveness suggests that policies to ‘boost exports’, ‘accelerate start-ups’ or build ‘growth companies with global ambitions’ only succeed if rooted in a highly performing national innovation system and the component business innovation ecosystems. National and global competitiveness are two sides of the same coin. Tekes support had an observable (short-term) impact on business performance To assess the impact of Tekes support, a literature review for the four main priority areas was carried out, an econometric analysis of data on companies which received Tekes funding from 2010-15 in each priority area and interviews were conducted with stakeholders and companies. For each priority area, a specific ecosystem that had received significant support from Tekes was selected for a case study analysis, namely: bio-based chemicals, smart grids, game industry and self-care and monitoring. A positive impact on employment was observed for bioeconomy and health for the period 2011-15. A positive effect was observed for bioeconomy, digital and health from year one, but in the case of digital for the first year only. The impact on turnover is less important with only bioeconomy recording a positive impact for the whole period. ICT and health recorded a positive impact on turnover but this occurred after a time lag of a
  4. 4. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen Global competitiveness is a team game year. The model did not allow to differentiate the year of impact for bioeconomy, suggesting that the turnover effect is spread over time. While the econometric findings should be treated with caution (given data limitations), they are in line with programme evaluations’ findings for the priority areas. A common observation is that impact on firm growth performance was limited (at least in the short term) and that effects were observed more in terms of networking, technological development and longer-term ‘ecosystem’ or value chain development (including via the development of public-private partnerships). Tekes has a distinct role in fostering the emergence of new business ecosystem but long-term impact requires improved synergies between Team Finland agencies For a new or emerging business ‘innovation ecosystem’ to achieve ‘global competitiveness’ requires a multi-faceted and multi-actor approach. The main impact of Tekes’s is through triggering and nurturing over a longer run period the emergence of new technology based ecosystems that help restructure traditional sectors or develop new high-value added activities. Finnish companies continue to view Tekes’ main role as funding technological development. Support for early-stage investment in technology solutions is critical, not only in monetary terms but also because Tekes provides a quality label (‘proof of concept’) in the eyes of (foreign) investors and partners. Tekes is less effective in fostering collaboration or value chains linkages both nationally and, particularly, internationally. Some initiatives including, the Tekes funded SHOKS, have helped to structure value chain relations within Finland. However, the Finnish ecosystems miss key competences (e.g. in industrial biotechnology) that requires complementary investments or linkages with international partners. The ecosystem cases underlined the significant role of larger or leading 'anchor companies' in the creation of ecosystems and their evolution. Incumbent large firms (e.g. in biofuels) may be critical for the development of new value chains but slow to shift towards the new business models (e.g. due to cost of adapting to new processes). The quality of interaction between such large or lead firms in ecosystems and smaller/start-up companies is critical. Across all four ecosystems, converting ‘national rising stars’ into ‘global players’ proved challenging, with exceptions (e.g. games). The obstacles differ but common themes included access to international market intelligence, regulatory differences/approval (e.g. self-care, smart grids), early integration/positioning in global value chains, or securing opportunities for piloting or testing products or ‘platforms’ in foreign markets. A key lesson from the study is that to achieve global competitiveness, the business ecosystems require tailored and diverse forms of support that often stretch beyond the remit and resources of Tekes alone. This applies in terms of the development of the new business models nationally (e.g. regulatory or policy changes lagging technology) as well as internationally (e.g. attracting strategic investors, etc.).
  5. 5. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen The challenge is to grow Finnish business ecosystems internationally Tailored support for ecosystems twinned with multi-agency interventions to secure international success The study team made six major proposals for re-orientating Tekes and Team Finland support and enhance the impact on Finnish competitiveness: · Tekes should focus on systemic impact, rather than individual ‘innovation events’. Greater attention to developing the foundations for promising ecosystems is required. This implies a systemic model where collaboration between Tekes and other Team Finland agencies and stakeholders is enhanced to ensure that Tekes funding or services are matched by actions on regulatory or other enabling conditions, etc. · The promotion of various ecosystems requires a different mix instruments and flexible partnerships. For some ecosystems, this may require the active construction of networks (in conjunction with other Team Finland operators), while for more strongly networked ecosystems (e.g. gaming) the role may be that of a 'background investor'. · In parallel to funding for R&D projects, Tekes should sponsor coordination and support, actions that map ecosystems or value chains (leading players, technologies, skills, infrastructures, etc.), in Finland and internationally. Tekes and Team Finland should ensure ecosystem companies can source investment for pilot or demonstration actions, strategic foreign direct investment, organise brokering and matchmaking events. · The emergence of new ecosystems generates a discontinuity in existing market and production structures, as well as traditional business practices. Tekes should to strengthen cooperation between large/incumbent firms and firms with new business models that are disruptors or enablers (e.g. digitalisation of bioeconomy) in reconfiguring value chains. In this respect, new competition based instruments (e.g. Challenge Finland) may be a promising model. · More attention to attracting strategic foreign direct investment (either new investment or through acquisitions) into emerging ecosystems. For example, Ireland's industrial policy instead of concentrating on increasing national companies 'organic growth', aims to attract high value foreign multinationals and build an ecosystem around these players. · The importance of developing strong synergies between ‘place-based’ (city or regional) strategies and strengths (Berlin for digital health) and national innovation and global competitiveness policies and agencies. Globally ‘visible’ cities within smaller countries (e.g. Copenhagen in Denmark) help attract not only investment to more broadly dispersed business ecosystems, but also attract talented and creative people. This may require a reflection on past experience with programmes such as INKA or draw on smart specialisation strategies at regional level to focus investment and international promotion. More information: Alasdair Reid, alasdair.reid@skynet.be; Kimmo Halme, kimmo.halme@4front.fi; Jari Hyvärinen, jari.hyvarinen@tekes.fi
  6. 6. Tekesin vaikuttavuusarviointi analysoi innovaatiotoiminnan ja Tekesin vaikuttavuutta Suomen elinkeinoelämään ja kansantalouteen

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