Multiple faces of competitiveness and the paradoxical case of Finland
Competitiveness is a highly debated topic in many forums, both academic and professional. The declining competitiveness of Finland has been a hot potato between Finnish politicians and trade unions, resulting in the famous “competitiveness agreement” requiring employees to work three extra days per year. This is a narrow perspective, focusing only on cost competitiveness. In academic forums competitiveness is studied at locational level (e.g., countries, regions of a country, cities), at cluster level (e.g., groups of related industries), and at company level. Paul Krugman (1994) argues that locations do not compete with each other, but firms do. Örjan Sölvell (2015) suggests that attractiveness may be a more suitable term in the context of locations, i.e. the ability to attract foreign direct investments (FDI) to the location. Michael Porter (2003) defines a region to be competitive if the firms operating there are able to compete successfully in international markets while maintaining or improving wages and living standards for the citizens. In other words, it is about constructing a high quality of life for citizens. This is a different perspective than the one used by Finnish politicians in that it aims to generate wealth based on high levels of productivity and innovativeness rather than reduce costs.
There is also divergence regarding the measurement of competitiveness. We can measure competitiveness based on input factors. For example, the global competitiveness index of the World Economic Forum (WEF) uses 12 types of input factors including basic factors such as institutions and infrastructure as well as advanced factors such as business sophistication and innovation systems (see Sala-I-Martin et al. 2014). We can also measure it based on output factors. The most common output factor used in earlier research has been economic performance measured by gross domestic product (GDP) per capita, export per capita and inward FDI per capita. There is recent research, which perceives competitiveness through the broader lens of social progress. The social progress index uses 53 indicators, which belong to three categories (see Social Progress Imperative 2017). The first category measures satisfying basic human needs such as nutrition and basic medical care, water and sanitation, shelter, and personal safety. The second category measures the well-being of citizens like access to basic knowledge, access to information and communication systems, health and wellness, and environmental quality. Finally, the third category measures the availability of opportunities to all citizens including personal rights, personal freedom and choice, tolerance and inclusion, and access to advanced education.
Finland is a high-performer when measured by inputs and social progress. Measured by inputs, WEF’s global competitiveness index ranked Finland the eighth out of 140 countries in 2016 behind Switzerland, Singapore, United States, Germany, Netherlands, Japan and Hong Kong. According to the same source, Finland used to be the world’s most competitive economy at the turn of this century. Despite this decline in competitiveness measured by inputs, today Finland is the world leader in the social progress index ahead of Canada, Denmark, Australia, Switzerland, Sweden and Norway. This performance is outstanding for Finland. The paradox of Finland is its relatively low performance in all three types of economic performance, i.e. GDP per capita, exports per capita and inward FDI per capita, compared with its European peers (in terms of level of development and population) like Switzerland, Netherlands, Sweden, Denmark, Belgium, Austria, and Ireland (see Table 1).
Table 1. Economic indicators for Finland and its peers (based on WEF, OECD and UNCTAD data)
The economic performance of Finland is paradoxical given that according to the global competitiveness index it is more competitive than the peers except for Switzerland and Netherlands. The results of Finland lead us, on the one hand, to challenge the validity of the index. We observe this paradox also in the case of Ireland (rank no. 24) which beats the more competitive peers in all of the selected economic measures. The results also force us to question the link between input factors and economic output factors. We can ask ourselves the following two questions. First, why is Finland’s export per capita so much lower than that of its less competitive peers in Table 1 (e.g., 52.8% of Denmark, 43.2% of Belgium, or 21.3% of Ireland)? This is surprising given that Finland has a highly educated workforce and ranks the second in the world in the ratio of R&D expenditures to GDP. Second, why is Finland’s inward FDI stocks per capita so much lower than that of its less competitive peers in Table 1 (e.g., 52.8% of Sweden, 40.4% of Belgium, or 18.1% of Ireland)?
In answering the above questions, we may consult the results of a survey made in 2013 with 1260 business leaders in Finland (see Apunen and Pajarinen 2013). This survey identifies a number weaknesses of Finland compared to its peer Western economies. These include among others issues related to the lack of wage flexibility and restrictions in hiring and firing due to powerful trade unions, the rigid labor market system, the lack of entrepreneurship, the taxation system, regulations, macroeconomic policies, and capital markets. Given these structural issues, Finnish policy makers could adopt a broader perspective to improving Finland’s economic performance and perhaps analyze the case of Ireland for identifying improvement areas.
Murat Akpinar, JAMK University of Applied Sciences, School of Business, murat.akpinar (at) jamk.fi
Keywords: competitiveness, Finland
References:
Apunen, M. and Pajarinen, M. (2013). Symptoms of an infection: This is what business leaders think about 19 elements of Finnish competitiveness. Helsinki: Finnish Business and Policy Forum.
Krugman, P. (1994). Competitiveness: A dangerous obsession. Foreign Affairs, 73(2), 28-44.
OECD (2017). https://data.oecd.org/ . Accessed on 18 May 2017.
Porter, M. E. (2003). The economic performance of regions. Regional Studies, 37(6/7), 549-578.
Sala-I-Martin, X., Bilbao-Osorio, B., Blanke, J., Hanouz, M. D., Geiger, T. and Ko, C. (2014). The global competitiveness index 2014-2015: Accelerating a robust recovery to create productive jobs and support inclusive growth. In K. Schwab (Ed.), The global competitiveness report 2014-2015: Full data edition (pp. 3-52). Geneva: World Economic Forum.
Social Progress Imperative (2017). http://www.socialprogressimperative.org/ . Accessed on 18 May 2017.
Sölvell, Ö. (2015). On strategy and competitiveness: 10 recipes for analytical success. Stockholm: Ivory Tower Publishers.
UNCTAD (2017). http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?IF_ActivePath=P,5&sCS_ChosenLang=en . Accessed on 18 May 2017.