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Finland’s R&D spending is recovering after a lost decade

The Finnish tech sector could benefit form better access to funds as the government prepares to increase spending on research and development

Finland’s IT industry looks set to benefit from more financial support for research and development (R&D) as the government merges funding sources.

In an effort to redress the decline in the nation’s R&D spend, and buoyed by a strengthening economy in 2017, the Finnish government reorganised its core research funding under the umbrella organisation Business Finland in January this year.

Business Finland was established through the merger of Finpro and Tekes. Finpro had previously operated as a primary provider of investment capital and internationalisation expertise to Finnish enterprises, and Tekes was a leading organisation in the allocation of state funding to innovative technology projects and activities.

The restructured Business Finland is part of an ambitious initiative by conservative prime minister Juha Sipilä’s centre-right coalition government to help scale up investment in R&D, with a particular focus on IT, artificial intelligence and digital technologies.

“It is important that we significantly lift spending on R&D in Finland,” said Pekka Soini, director general of Business Finland. “It would be useful if the government can address the funding issue ahead of the next general election in 2019 and before a new administration comes into office.”

High-end technological innovation has long been a fundamental dynamic in Finland’s economic growth and industrial expansion in recent decades. Backed by robust government policies offering a broad range of support to drive R&D, the country has used innovation, particularly in niche technologies, to help its manufacturing and service companies compete better in the world arena.     

As a result of the 2008 financial crisis, and the resultant cutbacks in public spending that affected virtually all state agencies and activities, the Finnish government’s capital expenditure on R&D had been in a period of decline. Also, the drop in state spending on R&D was mirrored by a lower level of private sector R&D activity.

Now Business Finland is ready to take on the role of the country’s most important public funding agency for R&D projects and activities. The agency will operate as a department of the ministry of employment and the economy, and faces the significant challenge of reversing the decline in R&D spending that remains a legacy of the financial crisis and subsequent austerity budgets.

“What is more worrying is that while public expenditure on R&D has declined, private sector investment in R&D also decreased by €1bn between 2008 and today,” said Soini. “We need to adopt a holistic approach to funding, and engage with the state and the private sector to re-energise investment activity. The government needs to invest in Finland’s future – R&D spending is an investment, not a cost. It should not be counted as business support.”

The decline in Finland’s national spend on R&D was seriously impacted in 2015 when Microsoft acquired Nokia’s mobile phone business for €5.5bn. The takeover had a negative effect on R&D spending given Nokia’s traditional role as a big spender on product development as Finland’s leading mobile communications technology innovator.

Marginal lift

However, Finland’s R&D spend did receive a marginal lift when HMD Global, a Finnish-owned company based in Helsinki, signed an agreement with Microsoft in 2016 to produce Nokia-branded phones under licence for the domestic and export markets.

The drop in state spending on R&D has also had a significant effect on state-funded research institutes. Latest data from Statistics Finland shows that €189m was allocated to R&D funding for research institutes in the Finnish government’s 2018 budget – a decrease of €6.1m from 2017.

Economists often refer to the 10 years after the 2008 financial crisis as the “lost decade” for Finland, which had previously been looking forward to moderate rates of annual growth. The recession, and the series of hard-hitting austerity budgets that followed, happened as unemployment soared and public finances deteriorated to a point where even R&D spend – once the sacred cow of all modern Finnish governments – was severely cut back.

But the tide turned for Finland’s economy in 2017, and state and private forecasters expect the country’s GDP to increase by 2.5%-3% in 2018, then slowing in 2019 to a rise of around 1.8%.  

“It was a lost decade, and the turnaround in fortunes for the Finnish economy is still very recent,” said Hannu Nummiaro, an economist at financial services group Lähi-Tapiola. “But we are now seeing growth again, and this means that the state and private sectors will increase their R&D budgets. This is a welcome development.”

The prospect of better times ahead for Finnish R&D is contained in the government’s budget for 2018. The total R&D budget is almost €1.9bn – a rise of 3.3% in real terms.

Also, the combination of a stronger economy, an upsurge in employment and a marked increase in tax revenues has strengthened the Finnish government’s capacity to bolster research funding for industry, which will increase by €102m to €303m in 2018.

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