From Path-Dependency to Knowledge-Based Economy - Analysing the Finnish ICT Miracle -

Essay, 2005

26 Pages, Grade: 1,7


Table Of Contents


1) Defining “structural change”

2) The structural development in Finland
2.1) Historical backdrop
2.2) The crisis of the 1990s and the way out

3) The development and importance of the ICT-cluster
3.1) From raw materials to mobile communications
3.2) The dominance/importance of the mobile sector
3.3) The central importance of NOKIA

4) Conclusion

5) Literature


Structural change has taken place all over Europe in the last decades. Phenomenons like globalization and internationalization of enterprises and markets have allowed free movement of capital and growing mobility. We are now “on the way to a global economy”. Globalization has made it necessary for national economies to accept and implement a sort of transformation process. With globalization, a new kind of competition game has emerged, of course with its own, new rules. Innovation abilities of national countries have become a central aspect in winning this game, or at least to gain some positive outcomes of it. So on the one hand each national economy must make sure to join this game and on the other hand not to fall by the wayside. Furthermore it has to adjust its national clusters and paths´ to innovative and future- oriented developments. Concerning most literature about this topic, its focus lies on central regions and processes like the structural change in the Ruhr Area. For me it is worth to take a look at Europe’s most peripheral regions as well since taking a glance beyond one’s own nose might reveal success stories and best-practices which could eventually add something to a positive economic and socio-economic development in the EU as a whole and in its member states, respectively.

One of these peripheral areas is Finland. The fact that Finland is far away from the centres of European economic activities, for example the so-called blue banana, the Sunbelt and the Industrial axe, its relative economic success, especially in the field of information and communication technologies (ICT) makes it so interesting to analyse what is so characteristic for the “Finish-ICT Miracle”, as Paija (2001) has called it. During the last decade, Finland has become one of the world’s most successful technology-intensive countries, finding itself in the front rank of the world’s digital economies. In a decade, Finland went from being one of the least information and communication technologies specialized countries to become the single most specialized one. “Currently the Finnish ICT sector, with Nokia as its locomotive, consists of some 6 thousand firms and accounts for approximately 10 percent of Finland’s GDP” (Rouvinen & Antilla 2003, p.87) and therefore have put Finland on the map of global economies. Determining for this “raise” of Finland is the development of a new growth path in this small Nordic country. Finland has managed to transform itself from a resource-based into a knowledge-based economy in a rather short period of time, especially without any major cutbacks in his highly developed welfare state system. The essential point of analysis in my essay deals with the question, how Finland managed to become one of the most successful ICT-countries in the world. How was it possible for this small Nordic country to go through a structural change from forestry to ICT? Nowadays, “about 6000 firms (mostly small and medium-sized) and 200 electronics manufacturing services companies make up the so called ‘ICT cluster’. Some 350 of them are first-tier suppliers to Nokia, and represent the ‘Nokia network’” (Daveri & Silva 2002, p.9).

So I will start my analysis by defining structural change to create a basic which is necessary to understand the whole process. With the use of statistical data I will then try to explain Finland’s way from forestry to ICT. A central aspect of the recent Finnish ICT-cluster is the importance of the mobile telecommunication industry with its driving engine, Nokia. This is analysed in part three. And finally of course, my essay ends up with a conclusion, summing up all the relevant information which is necessary to explain how Finland has turned into a knowledge-based economy.

Concerning methodology it has to be said that my work is based on recent scientific articles and essays instead of books simply because I want to keep it as actual as possible. Also statistical data is used from the internet ( and from some OECD-reports, cited in the relevant articles which I have used in my essay.

1) Defining “Structural Change”

Before I am going to start starting my analysis, it is first useful to define what is actually meant by the term ‘structural change’, so that we can better understand what has happened, and what actually is going on in Finland’s economy . In my point of view, “structural change” describes a more or less constant change of the contribution of the different sectors of the economy to the gross domestic product (GDP). The contribution of some economic sectors, like for example agriculture or forestry, to the aggregate economic product has steadily declined, while at the same time, the share of other branches of the economy, like the service sector in modern times, has grown increasingly. Structural change is accelerated by the development of new technologies as well as the increasing international competition (Pollert, Kirchner & Polzin 2004) and processes like globalization.

Schumpeter supported this briefly described, basic idea of structural change as well. He also considers the development of new technologies, or, as he puts it, “new combinations” (Hospers 2003, p.79) as the essence of structural change, because they lead to a process of “creative destruction through which the old economic structure is destroyed and a new one is created“. This “creative destruction” process described by Schumpeter is an important act to consider in my following work as well.

According to Hospers (2003, p. 81) the French economist and “father of the structural change theory”, Jean Fourastié, goes one step further than Schumpeter and does not only see innovations as the driving force behind structural change: He claims that structural change, in the first place, can be explained through the “imbalance between the growth of production and consumption”. This means that because of consumers demanding more and more services while at the same time the growth of production taking place in the first and second sector the economy has to go through a structural change in order to be able to handle this supply/demand bias.

In a knowledge-based economy, firms are dependent on the knowledge resources of other firms. Especially in the information and communication technology (ICT) industry, technological race and shortening product life cycles have forced companies to focus on their core-competencies and to get access to the resources of other specialised companies. This is done by inter-firm contracts or networking. Fruitful inter-firm activities induce knowledge spillovers and accumulation as well as technology transfers, which in turn stimulate innovations. According to Paija (2000, p.2), “increased outsourcing of equipment manufacturers (OEM) and deepening partnerships with subcontractors has marked the organisational development in the industry in the 1990s”. In Finland, to be concrete, Nokia in particular has created very confidential relations with its key partners, who enable early development of future products, and which is a precondition for the technological leadership Nokia pursues.

Now I will try, having the thoughts about “structural change” in mind, to turn to the development in Finland in detail, by analysing whether this structural change, together with a possible path-shift, took place or not.

2) Structural Development in Finland

2.1) Historical Backdrop

-The Phase of Path-Dependency –

Of course, Finland’s transition to a high-tech economy has not really taken place as suddenly as it seems. In the background is a long, self-strengthening and complex development process that started early in institutions, organisations and throughout the Finnish society with the beginning of the 1900s. The dominance of the ICT-cluster in Finland in the time under Russian rule especially was relevant for the discussion. Looking back to the middle of the 19th century, in contrast to other European countries, Finland was still highly underdeveloped and far away from industrialization. The majority of the Finns lived in rural areas, which were dominated by self-sufficient economy. At that time, “only some 30,000 Finns worked in industry. That is about half of the workforce of Nokia”[1] today. In my point of view the main reason for this underdevelopment up to the mid 1800s was Finland being poor of natural resources. Except for some copper, the only relevant income source of the Finnish economy has been timber for a long time. This relevance became even more significant when other European states started demanding more wood than they could supply themselves. Because of this increasing demand for wood, especially as a material for railroads, construction, mining, and paper, Finland could finally start its industrialization. Therefore it can be followed that the decisive factor for the Finnish take-off phase was the endowment of its most important and virtually only natural resources: forests.

Quick advancement in prosperity towards the end of the 1800s and in the early 20th century was based on rapidly growing exports of forest-related products—first timber and later, pulp and paper. From the late 1950s to the late 1970s, the Finnish forest industry carried out massive investments and transformed itself gradually into a global technology leader most modern and efficient production capacity in the world According to Rouvinen & Anttila (2003, p.9), “by the late 1980s, the forest sector had developed into a competitive industrial cluster that today provides high value-added paper grades, as well as forestry technologies and consulting services”. One the one hand it can be followed that Finland was characterised by a path-dependency of the forestry but that on the other hand, this path-dependency had made Finland growing and made it competitive.

Figure 1:

illustration not visible in this excerpt

Figure 1 shows that the Finnish economy grew rapidly at that time and because of that, during the 20th century, Finnish GDP per capita grew at an annual rate of close to 3 percent, that is faster than in any other European country (The downfall in the middle of the 1990s was because of the economic crisis there which hit Finland at its hardest. But I will later explain those developments in detail).



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From Path-Dependency to Knowledge-Based Economy - Analysing the Finnish ICT Miracle -
University of Münster
European Economic Policy Course
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"Analysing the Finnish ICT industry" Essay for a Masters course in European Studies at the UT`s Twente/Münster
From, Path-Dependency, Knowledge-Based, Economy, Analysing, Finnish, Miracle, European, Economic, Policy, Course
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Patrick Lubjuhn (Author), 2005, From Path-Dependency to Knowledge-Based Economy - Analysing the Finnish ICT Miracle -, Munich, GRIN Verlag,


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