Finland must take a leap towards new innovations

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1 Finland must take a leap towards new innovations Innovation Policy Guidelines up to 2015 Summary

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3 Finland must take a leap towards new innovations Innovation Policy Guidelines up to 2015 Summary 3

4 Foreword T he long-term innovation policy of Finland has been successful and resulted in strong national competitiveness. However, the Finnish economy is facing significant challenges that are enhanced by the global financial crisis, the threat of a slow recovery period with low economic growth, and by the structural changes that are currently taking place within the Finnish industries. International competition, digitalisation, aging of the population and other major challenges such as climate change and sustainable development are changing the preconditions for innovations. These challenges force Finland to reform its innovation environment in order to raise know-how and competence levels, identify new innovations and improve both productivity and competitiveness. Finland s success in the future will be based increasingly on innovation-led economic growth. The necessary innovation policy reforms are guided by the Finnish Innovation Strategy, whose key goals are to improve productivity and ensure that Finland achieves a pioneering position in selected top expertise areas. According to the conclusion of the international evaluation of the Finnish National Innovation System, commissioned by the Finnish Government and published in autumn 2009, the innovation system has functioned well but requires urgent reforms. Investments in education and innovation were identified as strengths, while the low degree of internationalisation, inability to attract foreign experts and enterprises, as well as the failure to create a sufficient amount of growth companies was identified as weaknesses. Improving the competitiveness of enterprises is increasingly important as Finland seeks new sources of competitive advantage to safeguard the foundations of the welfare society. Effective and efficient public administration has a major role in national competitiveness, too. Developing innovation within the public sector is also important for the businesses. Public sector decisions and policies must enhance the markets and operating conditions for businesses also in branches such as healthcare, where public sector liability is high. Finland needs new operating models based on partnerships where the duties of the public sector are carried out jointly with the private sector. Thus, new solutions in the public sector can help creating entirely new markets. 4

5 The significance of services in society is growing constantly. Service innovation is an important form of innovation. Research and development of services, improvements in service productivity and the internationalisation of services offer significant opportunities that must be utilised more effectively in the future. The strengths of the Finnish innovation policy have traditionally been closely linked to high technology. Today, in addition to technology, innovation increasingly refers to services, business models and other forms of non-technological innovation. Taking this into account there is a clear need to combine technological and non-technological innovation efforts. The broad nature of innovation policy calls for increased horizontal co-operation across public sector administration. Sectoral policies must be coordinated better, as they often involve themes and development needs that are beyond the scope of a single branch of administration. With open innovation activities becoming increasingly common practice, companies are frequently seeking more extensive and open co-operation with external partners. Customer and user focus that is closely linked to open innovation has given end users more important and diverse roles in enterprise innovation activities. The key challenge in this lies in deepening collaboration and mutual understanding between businesses and end users. The objective of the Confederation of Finnish Industries EK is that Finland will continue to be among the top countries building their future on knowledge, competence and innovation. Finland has every opportunity to succeed and stay at the forefront of global development due to the solid basis of its innovation system. Nevertheless, the system must be developed and improved even further. This publication is the English summary of the innovation policy guidelines 2015 published by the Confederation of Finnish Industries EK in spring Hannele Pohjola Director of Innovation and Growth Policy 5

6 More incentives and impact needed in the public support of enterprise innovation activities Innovation-led economic growth requires that the public and private sectors make considerable investments in research, development and innovation (RDI). Total RDI expenditure in Finland amounted to EUR 6.9 billion in Enterprises accounted for 74% of the total, universities 17% and the public sector 9%. The share of the private sector is internationally significant. R&D investments in Finland represent an internationally high share of GDP, second to only Sweden in the EU. Nevertheless, Finland is a small country, which means that absolute RDI resources in terms of both funding and human capital are limited. Large corporations are responsible for the majority of private sector R&D investments in Finland. As investments in the ICT sector are dominating, there is wide potential for developing R&D activity in other industries, particularly in SME s and services. Finland s public funding for enterprise R&D, when both direct financing and tax subsidies are taken into account, is internationally at a low level. Unlike many other countries, Finland does not have tax incentives for private sector R&D. Instead, RDI activity is supported only through direct funding. In order for the business sector to achieve broad-based renewal, RDI activity must have a wider foundation. It is highly important to evaluate how public funding can be used to promote innovation policy objectives. Public RDI funding should be reflected in, among other things, business growth, increase in productivity and in creation of new enterprises. As a consequence, impact criteria must be developed to support decision-making. Direct public financing of enterprise R&D activity and tax incentives for R&D, 2007 % share of GDP South Korea (2008) Canada (2008) France (2008) USA (2008) Belgium Austria Czech Republic Japan Spain United Kingdom (2008) Ireland Hungary Norway (2008) Sweden Denmark (2008) Netherlands Australia (2006) FINLAND Portugal Germany Iceland (2008) Luxembourg New Zealand Italy Switzerland (2008) Turkey Slovakia (2008) Poland Mexico Greece (2005) Direct public funding of enterprise R&D activity Indirect public support through R&D tax incentives 0 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40 Sources: OECD, national estimates from the NESTI Working party and OECD Main Science and Technology Indicators Database,

7 EK s recommendations: Finland needs strong public and private investment in research and development with the target level at a minimum of 4% of GDP. Direct public RDI funding must be directed at challenging projects to promote risktaking. Funding should support strategic choices, encourage networking and emphasise high quality and internationalisation. R&D tax incentives for enterprises should be introduced in order to increase the number of enterprises engaged in RDI. The possibility of a tax relief for income derived from intellectual property rights should also be investigated. This would encourage investment and utilisation of the results of R&D activities in Finland. Networking and co-operation between public funding agencies and private equity must be developed to better support the connection and continuity of funding through the various development phases of enterprises. Methods for assessing investments in innovation as well as and the results and impacts must be reformed. The metrics used must be better suited for the broadening scope and nature of innovation activities. 7

8 The innovation system must be developed on a broad basis Effectively operating markets that support competition, better regulation, incentivebased taxation, healthy financing system and education policy based on labour market needs are needed besides public RDI funding to provide an optimal growth environment for innovation. The Finnish public sector offers enterprises a wide range of services. However, the enterprise service system as a whole has repeatedly been found to be complicated. Despite the fact that actors involved in the system may have a clear role in their own view, the system as a whole does not function as it should. The public enterprise service system must be developed on the basis of customer needs. Service processes and services must be organized accordingly. Networking and customer collaboration of public and private service organisations must be strengthened. The needs of growth companies and companies with significant growth potential must be prioritised. Finland needs more growth companies and high-growth entrepreneurship, which calls for more effective strategic steering of the national growth entrepreneurship policy. The number of growth companies must be increased by making diverse and parallel use of the tools that increase the ability and willingness of enterprises to grow. Capital requirements and responsibilities related to risk assessment and management of financial institutions will Assessment of the innovation system from the point of view of facilitating private business and innovation activities % Smaller innovative enterprises Larger innovative enterprises Other enterprises Governmental organisations supporting innovation activity Organisations supporting education Other Ministries Other governmental organisations Employment and Economic Development Offices Other organisations in agency roles Private individual investors, venture capitalists Banks, lenders Source: The Research Institute of the Finnish Economy ETLA, 2009 become stricter after the financial crisis. This will result in an increased cost and reduced availability of financing. Effective functioning of domestic capital markets is important for Finnish Very simple or quite simple Very complicated or quite complicated 8

9 enterprises, as financing from foreign investors is often linked to the interest and involvement of domestic investors. An active capital market also serves to attract foreign capital to Finland. Use of ICT by small enterprises to exchange information with business partners, 2009 % Netherlands Germany Lithuania Slovakia Estonia Denmark Italy Sweden Malta Latvia Portugal Slovenia France EU-27 Belgium Luxembourg FINLAND Poland Spain Ireland Austria Czech Republic Hungary Greece Romania United Kingdom Cyprus The availability and continuity of financing and business expertise are key challenges facing growth entrepreneurs. Both the available risk capital and knowhow may be increased by Use automated data exchange between the enterprise and its business partners Regularly share electronically information on the supply chain management with suppliers and customers Source: Eurostat Community Survey on ICT Usage and ecommerce by Enterprises 2010 developing the prerequisites of private equity and implementing tax incentives for risk capital investments made by private individual investors. Alternative risk financing must also be facilitated by lowering the threshold to become listed on the public stock exchange and developing the marketplace for growth companies. Development of information and communications technology (ICT), new innovations, services and processes provided by ICT create significant growth potential for the society as a whole. The use of ICT in smaller enterprises in Europe is lagging behind and needs to be accelerated. Taking full advantage of the development of the information society will provide opportunities for boosting productivity in both the public and private sectors, securing the availability of public services and promoting enterprise competitiveness. The significance, methods and application of design have changed a great deal in recent years. Design is being utilised increasingly outside the realm of traditional industrial design, in new industries and new kinds of environments. For instance, user-centric service design has become more widespread in public and private services. The application and use of design, in particular among SMEs, must be promoted through public policy. 9

10 EK s recommendations: The Finnish innovation system must be developed on a broad basis, including financing and other public services for enterprises, taxation and the digitalisation of the society. The public enterprise service system must be simplified and public sector operating models must be developed to better meet customer needs. The service system must be more flexible and able to adapt to needs of different kinds of businesses and geographical regions. The operational conditions of private equity must be improved by removing taxation-related investment disincentives and through the implementation of measures to enhance prerequisites of private equity and provide incentives for investment. Tax incentives for risk capital investments by private individual investors must be implemented to increase availability of risk finance as well as know-how for the enterprises. The threshold to become listed on the public stock exchange must be lowered and the marketplace for growth companies and its operating conditions must be developed. There is a need for a progressive policy to lift Finland back to the top global digital economy performers. Coordination and steering of information society policy between different actors and branches of administration must be increased. Finland must increasingly invest in creativity. The use of design must be promoted in enterprises. 10

11 High quality and competitiveness requires profiling and focused allocation of resources T he Finnish higher education and research system is fragmented. The roles of universities, polytechnics and research institutions are presently not fully clear. Finnish universities are divided internally into research and education units that are too small. In order to be successful globally, universities must form sufficiently large or specialised research and education units that are networked with international hubs of top expertise. A fragmented structure and small-scale operations fail to provide the necessary conditions for highlevel research and teaching based on it. Internationalisation and global co-operation are essential starting points for innovation activity. Due to its small size, Finland is particularly dependent on knowledge and expertise created outside of its borders, which makes it important to strengthen international interaction. Internationalisation should be a natural element of all development work in enterprises, not a separate function of its own. A strong desire is required from Finnish enterprises and other actors to reach a pioneering position and high quality and expertise in their operations. Even the largest innovation clusters in Finland are small on a global scale. While Finland has had success in its innovation-led regional development, this approach has also led into a highly fragmented national innovation system. Regional development activities are characterised by their fragmented nature and the large number of various programmes and projects. There is an inability to fully benefit from the regions that are leaders in innovation and where R&D investments are already concentrated. Improving the quality of RDI activities requires Network of universities, polytechnics, public research institutes and technology centres University University unit Polytechnic Polytechnic unit VTT Technical Research Centre or other public research institutes Public research institute unit Technology centre Source: Tekes, the Finnish Funding Agency for Technology and Innovation Yliopisto 11

12 stronger thematic focus. This can be supported by, among other things, improving interoperability between different forms of innovation programmes, clarifying their focal areas, investing in longterm expertise in the selected focal areas, reforming the higher education system and sharpening regional profiles. The concentration of expertise can also be promoted through bringing together academia and industry around major environmental and social challenges. EK s recommendations: Fragmentation and redundancy in the public research systems must be reduced. Performance management system must support stronger profiling. The ambition-level in internationalisation of research, development and innovation activities must be raised. This requires that activities and resources are combined between enterprises, research organisations, funding and service organisations, administration and regions. In order to be competitive and attractive, the Finnish innovation system needs to reach a critical mass in terms of expertise and innovation activity. This can be achieved through growth in selected focal areas. Stronger policies are needed to support innovation environments in the Helsinki Metropolitan Area and other large cities. 12

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14 Confederation of Finnish Industries EK PL 30 (Eteläranta 10), FI Helsinki Tel Fax Report on the Internet: Further information: Director of Innovation and Growth Policy Hannele Pohjola Tel hannele.pohjola@ek.fi Editor: Hannele Mayer-Pirttijärvi Layout: Tiina Aaltonen, gra & grappo EK, October 2010