Where did the Finnish growth recipe go?

 

Intangible investments increase productivity faster than traditional tangible investments. They have a significant impact on the productivity, competitiveness and growth of companies and the economy as a whole. Besides research, development and education, not only software and brands are an important part of intangible investments, but also the expertise of personnel and the renewal of organisational structures.

In Finland, intangible investments were roughly equal to investments in traditional tangible capital, i.e. machinery, equipment and buildings, in the early 2000s, but after 2014 they have lagged behind tangible capital.

What has happened in Finland’s key competitor countries during this time? While Finland’s ratio of gross intangible investments to GDP has decreased, competitor countries have increased their share. In Finland, intangible investments account for 4.4 per cent of GDP. The corresponding figure is 7.2 per cent for Sweden and 5.9 per cent for Denmark. The ratio is 5.3 per cent in the US, 5.6 per cent in Japan and 7.1 per cent in South Korea. In Switzerland, the figure is almost 10 per cent.

The level of R&D investments in relation to turnover is below the level of 2008

Looking at Finnish companies, we can see the same phenomenon from a different perspective. During the last 15 years, the combined R&D investments of Finland's HEX25 companies (i.e. the 25 largest listed companies in Finland) amounted to an average of 2.5 per cent of the combined turnover for the years 2008–2023. The corresponding figure was 4.1 per cent in Sweden, 3.6 per cent in Germany and 2.8 per cent in Denmark.

Excluding Nokia, Finland’s R&D investments would be even grim, as Finland compares to the poorer countries in Southern Europe with its share of 0.7 per cent. These averages conceal the trend in the growth of R&D investments in recent years. In this review, too, Finland lags behind its peers, as the level of investments in relation to turnover has barely increased since 2008, whereas the trend has been ascending in Sweden, Denmark, Germany and the USA. The level of R&D investments in relation to turnover is still below the level of 2008 in Finland.

What does this micro-level examination show? If the largest companies in Finland’s key competitor countries are investing more in the development and innovation of their products and services than Finland in general, one might think that the competitive position of Finnish large companies will not improve rapidly in the future. On the contrary, it may even deteriorate without rapid action if and when the use of AI becomes more commonplace.

A reform of the corporate structure is absolutely necessary

The main explanation for Finland’s weak R&D investments and the growth trend in intangible investments in general can be found in our corporate structure. The number of technology-intensive large companies is very modest on the Finnish stock exchange. This partly explains the fact that the productivity development of Finnish work has lagged so dramatically behind the comparison countries. An increase in productivity will hardly be possible without a significant reform of the Finnish corporate structure.

The average return on equity over the past 10 years has been 3 percentage points higher for the 30 largest companies listed on the Stockholm Stock Exchange than for the 25 largest listed companies in Finland. In the long term, the differences in returns become dramatic on a compound basis. The corporate structure also plays a key role in this divergence. In Sweden, the corporate structure has reformed and been able to increase value added and profitability. The Finnish corporate structure is characterised by strong stability with regard to the large listed companies.

Shareholders should look in the mirror

Finnish shareholders certainly also need to look in the mirror with regard to how Finnish listed companies have invested in intangible investments. Nor can the largest shareholders of Finnish listed companies, including Finnish pension companies, one of which is Elo, avoid their own liability. The question arises whether the shareholders have used their voice correctly and demanded R&D investments from the companies they own, or whether the owners’ focus has been too much on fostering profitability. One of the shareholder's key tasks should be to encourage innovation and reform to secure the company’s future.

In global competition, information and technology are increasingly important growth drivers. It is absolutely essential that the role of intangible investments as a strengthener of economic growth and competitiveness is recognised in Finland in a new way. Investments, creating new things and growth take place in companies. We need to put in place incentives for companies to innovate, but shareholders also need to use their voices so that companies do everything they can to find the recipes for future growth. From the point of view of Finland as a whole, it is essential that we also redeem our reputation as a leading country in technology in the field of business.