What next? Finnish ICT Cluster and Globalization

What next? Finnish ICT Cluster

and Globalization

Dan Steinbock

Alueiden kehittäminen

SISÄASIAINMINISTERIÖN JULKAISUJA 38/2004

What Next? Finnish ICT Cluster and Globalization

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What Next?Finnish ICT Cluster and

GlobalizationDan Steinbock

Alueiden kehittäminen

SISÄASIAINMINISTERIÖ

Helsinki 2004


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MINISTRY OF THE INTERIOR FINLAND

Department for Development of Regions and

Public Administration

Pl. 26, Korkeavuorenkatu 21

FIN-00023 Government, Finland

ISSN: 1236-2840

ISBN: 951-734-746-4 (NID.)

ISBN: 951-734-747-2 (PDF)

Layout: Kerttu Keränen

Printed in Finland by Suomen Printman Oy,

Hyvinkää 2004


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Introduction

Through the past 30 years, the development of Finnish economy and the regionshave been based on the public sector increasing its proportional share in theeconomy. As with the Nordic welfare society, the tasks that have been taken careof by the public sector have increased, while the development of public servicesrequires more of the resources of national economy. Between 1960 and 1990 thepublic sector employment tripled. At the same time total employment in the priva-te sector somewhat declined. The good net growth of the employment before therecession of the 1990s was based on the increase of jobs in the public sector,which was followed by a relatively well-balanced regional development. Now thesituation is quite different.

A significant change took place in the development of Finnish economy andregions at the end of the 1990s. Public sector lost its leading role in economic andemployment growth. New jobs and migration were concentrated in the five largestcity regions and Salo. The intense growth of the ICT-sector in the cities was thereason for this. The importance of big city areas for the development of nationaleconomy grew with globalisation.

Currently, the regional structure is being formed by the integration of the mar-kets and the global economy. The general trend of development is concentrationbut at the same time the whole economic structure is changing in a way thatallows many smaller areas to get more new production. Economic labour marketand regional development has now a completely different manner and logic incomparison to the development of the 1980s. The intense growth, dominated bypublic sector, is no longer possible. There is no return to the old developmentmodel.

After the economic and unemployment crises of the early 1990s Finland wasone of the most developed countries in the EU using production growth, inflationand better employment as criteria. Finland’s rise from the recession was basedon skills and innovation. Finnish economy moved quickly from investment drivengrowth into a new innovation-driven stage of growth. Along with human capital,technological development has been the key factor in the economic growth. In-vestments on skills and capabilities have increased considerably and investingin fixed capital has remained lower than before. This has meant a substantialchange in the composition of the investments.

Finnish economy has become more internationalised and, in the past few


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years, it has been assessed as highly competitive. Despite these developments,there are relatively few international companies and skilled foreign labour in Fin-land. The question is, why?

In an open economy the pressure for change in the regional structure and thespeed of changes are faster than before. It is thus vital to provide expert knowled-ge to regional policy planners and decision-makers of changes caused by Euro-pean and global integration – and, if necessary, to change the strategy, empha-sis and measures of regional policy and regional administration

The key question of the future regional development is whether Finland will besuccessful as a user of the new information technology and not only a producer.To produce information services and contents can have a much wider basis thanwhat is currently the case. All regions cannot be successful ICT producers, buteach of them can increase their competitiveness through skilful ICT use.

The comprehensive educational network of Finland enables developmentbased on expertise: universities, polytechnics and second grade vocational trai-ning support city regions on every level. In order to develop, every field of pro-duction needs top expertise. Universities, polytechnics and science parks arethus central actors in the new growth. Basic factors for growth in the city regionsare technology oriented research- and development operations and productiveapplications, inputs on expertise and human capital, social innovations, functio-nal infrastructure as well as good accessibility that requires functional logistics.

The competitiveness of the regions consists of quality factors that make cer-tain regions attractive operating environments for businesses and skilful labour.Increasingly, the competitive ability of companies consists of local resources andquality factors. National politics without local commitment and division of labour isnot sufficiently effective.

Narrow technology policy will no longer be sufficient. We need an extensiveinnovation policy and development of innovative environments. As a small count-ry, Finland needs a special policy that is suitable for a small country in whichdifferent actors of innovation policy cooperate intensively and systematically.We need specialisation of the regions, deepening division of labour within thecountry and between city areas as well as networking, cooperation and creationof clusters. The competitiveness of the regions ought to be strengthened so thatthey become internationally attractive operating environments in their own fieldsof expertise as well as pleasant living environments for skilful labour. It is neces-sary to decentralize national innovation policy.

This study represents one part of a broader research initiative commissionedby Finland’s Ministry of the Interior. Its purpose is to garner information about the


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internationalisation of big city regions in order to extend significantly the regionalinnovation system. This report is also motivated by the need to obtain a betterpicture of the relationship between innovation policy and regional policy as wellas the role of the regions in a small and open national economy.

Furthermore, the purpose of this study is to evaluate the development of clus-ter dynamics and regional determinants that are necessary for improved compe-titiveness nationally, and especially internationally. Hence, the study illustratesthe importance of the analysis of the ICT cluster and its future challenges for theregional policy of Finland in an increasingly global economy.

In Finland the emphasis of the innovation policy has traditionally been natio-nal by nature. The regional perspective grew to be a part of the Finnish innovati-on policy during the 1980s. It was consolidated in the mid 1990s. However, regio-nalism also had a role earlier e.g., through the establishment of new universities,in industrial policy and especially in the legislation of regional development. Fora decade, the Centre of Expertise Programme has been the driving force of re-gional innovation policy. It has been substantially supported by regional policyand the Structural Funds of the EU. In developing innovative environments, citiesand city regions have become increasingly active; thus playing a role in regionalinnovation policy, as well as along with it. In this study we wanted to learn more onthe role of the regions and public sector in the development of the operatingenvironment and competitiveness of businesses. Thereby we also hope to gain abetter understanding of the challenges for cluster policy.

The rapid changes in economic globalisation and regional economy increaseinterest in this research. Even Finnish businesses seem to locate more easily tocountries with larger markets and cheaper production costs. It is important toform an overall view of the effects of globalisation on the competitiveness of na-tional states and regions. By the same token, it is vital to learn more on the role ofknowledge and expertise in competitiveness. With this study, we sought to findmore information on these determinants, particularly on the dynamics of clus-ters, regions and Finland as an attractive business environment for foreign com-panies and high-skill labour.

The importance of knowledge and expertise as competitive determinants issubstantial in fields where technological development is intensive. R&D activitiesand demand will create new products and new jobs. Companies in these fieldstend to locate in the largest cities near university campuses and research institu-tes. The fertility of innovations probably depends highly on local and regionalresources. The important question is how to promote creation and developmentof new competitive and innovative operating environments?


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Veijo KavoniusDeputy Director-General

Ministry of the Interior Finland

Is it possible that national innovation policy, including cluster policy and net-working, have some kind of a special task in regional development? Does regio-nal innovation policy have a role in the decentralization of national policy? Doesit have a role in the division of labour between different regions and the deepe-ning of technology and innovation policy? When the international innovationcompetition accelerates, national resources should probably be directed moreclearly to current and emerging segments, where the role of the regions andregional diversity should be strengthened.

The Ministry of the Interior thanks Professor Dan Steinbock for this large-scale research project. The conclusions presented in this study are his personalviews that hopefully contribute to discourse on the effects of globalisation oncluster dynamics and the role of regional innovation policy as a part of the natio-nal innovation policy. The Foreword has been written by Professor Michael E.Porter of Harvard Business School. The Ministry of the Interior of Finland wishesto express its sincere thanks also to him for his comments and interest in thesubject of this study.


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TABLE OF CONTENTS

INTRODUCTION. Veijo Kavonius .................................................................... 3

EXECUTIVE SUMMARY ................................................................................ 10

GLOBAL COMPETITION, CLUSTERS AND FINLAND´S WIRELESS

VALLEY. Michael E. Porter ............................................................................. 13

PREFACE. Dan Steinbock ............................................................................. 17

1. INTRODUCTION ...................................................................................... 23

2. FINLAND’S WIRELESS VALLEY: NOKIA AND ICT CLUSTERIDENTIFICATION ..................................................................................... 27

2.1. Cluster Mapping........................................................................... 28

2.2. Relevance of the ICT Cluster ..................................................... 31Localization: Structure and Scope of the ICT Sector in Finland ...... 32Globalization: Production and Foreign Trade of ICT Goods .......... 35

3. THE ICT CLUSTER ................................................................................. 39

3.1 Competitive Stages ..................................................................... 39The Factor-Driven Stage: Local Competition, Long-DistanceMonopoly ......................................................................................... 40The Investment Stage: The Duopoly Era ....................................... 41The Innovation-Driven Stage: From the Mobile Industry to theICT Cluster ...................................................................................... 43

3.2 The Role of Nokia ......................................................................... 47Nokia in History ............................................................................... 47Nokia and Mobile Communications ................................................. 49

3.3 Public Policies and Private Strategies ..................................... 50 Localization: From Investments Policies to Regional Innovation ... 50

Nokia’s Innovation ........................................................................... 56


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3.4 Struggle for Industry Leadership ................................................ 66Competitive Threats and Opportunities: U.S. IT Versus EuropeanMobile .............................................................................................. 67Competitive Strengths and Weaknesses: Reorganization and Relocation ....................................................................................... 70

3.5 Finnish ICT Market ....................................................................... 72Market Volume ................................................................................ 72Competitive Trends ......................................................................... 72

4. DYNAMICS OF THE ICT CLUSTER ........................................................ 78

4.1 Competitive Conditions .............................................................. 78

4.2 Related and Supporting Industries .......................................... 85

4.3 Factor (Input) Conditions............................................................ 90Finnish Innovation System .............................................................. 90

Regional Innovation ........................................................................ 93Capital Resources........................................................................... 96

4.4 Demand Conditions ..................................................................... 99Public Sector ..................................................................................100Business Markets ...........................................................................100Consumer Markets .........................................................................101Government Policy .........................................................................103Educational Policy ......................................................................... 104Science Policy ............................................................................... 104Technology Policy ......................................................................... 105Competition Policy......................................................................... 106Communications Policy ................................................................. 107

5. THE DISCONTENTS OF INNOVATION ................................................. 109Advantages and Disadvantages of Pioneership .......................... 109ICT Cluster and Productivity ......................................................... 111ICT Cluster and Innovation .............................................................113ICT Cluster and New Business Formation..................................... 116Institutional Capabilities and Firm Performance ........................... 118

LITERATURE ................................................................................................ 121


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EXHIBITS

Exhibit 1-1 Salcomp’s Growth YearsExhibit 3-1 Stages of Economic Development: Finnish TelecommunicationsExhibit 3-2 The NMT Concept: Market Needs Define System Requirements

(1969)Exhibit 3-3 Liberalization of Telecommunications in Finland (1987-99)Exhibit 3-4 Reasons to Invest in Finnish ICTExhibit 4-1 Graduate Schools: ICT ConcentrationsExhibit 5-1 Nordic Egalitarianism Versus Global Competition

FIGURES

Figure 2-1 Finnish ICT Cluster: Products and ServicesFigure 2-2 Finnish Industry Groups: Export Shares (1960-2002)Figure 3-1 M&A Waves: Concentration of Finnish TelcosFigure 3-2 Finnish ICT R&D Leaders: Nokia’s RoleFigure 3-3 R&D Expenditures: Nokia and the Role of Tekes (1969-2000)Figure 3-4 Nokia’s R&D: Production LocationsFigure 3-5 Nokia’s R&D and NRCFigure 3-6 Industry Value System: Evolution, Specialization and GlobalizationFigure 3-7 Dynamic View of the Finnish ICT MarketFigure 4-1 Sonera’s “Dual-Track” Growth StrategyFigure 4-2 Worldwide Locations of Elcoteq and PerlosFigure 4-3 R&D Input in Some OECD CountriesFigure 4-4 VC Investments in Finland: By Industrial Sectors and Regional

Distribution (2002)Figure 4-5 Analog and Digital Subscriptions (1980-99)Figure 5-1 Two Faces of Finnish Wireless Cluster

TABLES

Table 2-1 Key Economic Indicators of the Finnish ICT Cluster (2000)Table 3-1 Finnish ICT R&D LeadersTable 3-2 Nokia’s Core R&D Locations and Capabilities (ca. 2000)Table 3-3 ICT Trends (IDC, 2003)Table 4-1 ICT Companies in Finland (2001)Table 4-2 Finnish Top-50 ICT (2002)Table 4-3 The Nokia Effect: Finnish Capital Markets and the Helsinki Stock

Exchange (1990-2000)Table 5-1 Innovator’s Dilemma and Finnish ICT: How First-Mover Advantages May

Turn Into First-Mover DisadvantagesTable 5-2 Total Entrepreneurial Activity (TEA): 29 Countries, 2001


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Executive Summary

In his Foreword, Professor Michael E. Porter, the pioneer of cluster studies world-wide, calls the study at hand – What Next? Finnish ICT Cluster and Globalization– “revealing and significant” and argues that it “promises to reshape the dialoguein Finland and shead light on an important case globally. It is certain to informscholars and policymakers in other countries.”

Since the late 1990s, Professor Porter has been involved with the annualGlobal Competitiveness Report, published by the World Economic Forum. In theForeword, he notes that, “in Nordic countries, a long history of egalitarianism isnow confronting global competition with its imperative of cost efficiency… As theFinnish mobile cluster demonstrates, sustained success requires often difficultstrategic tradeoffs – not because they are ideal, but because alternatives areworse.”

Written by Dan Steinbock, visiting professor at the Helsinki School of Econo-mics and affiliate researcher at the Columbia Institute for Tele-Information (Co-lumbia Graduate School of Business), explores the economic significance anddynamics of the Finnish ICT cluster amidst globalization. He focuses on the extra-ordinary boom period from the early 1990s to 2002, to allow for Nordic compari-sons. However, the study also covers the evolution of the ICT cluster. Indeed, thenew challenges of the Finnish ICT cluster stem from threats and opportunitiesdriven by globalizing industry rivalry in mobile communications.

Traditionally, Finnish cluster studies have favored an ‘inside out’ perspective,exploring the clusters on the basis of domestic capabilities rather than actual firmperformance. The present study emphasizes an ‘outside in’ perspective, explo-ring Finnish cluster developments from the standpoint of globalization and loca-lization.

Due to its evolutionary context, the Finnish ICT cluster grew around Nokia.With the transition to digital cellular in the early 1990s, Nokia opted for a boldglobal focus strategy. Among the pioneering vendors and operators, it intensifiedindustry globalization, which has provided extraordinary opportunities to itscooperators and many other Finnish companies. With the transition to multime-dia cellular, Nokia has recently opted for still another new bold strategy. In 1992,the industry was emerging and still domestic. Today, strategic choices take place


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in a rapidly maturing and globalizing industry environment (during the peak of2001 Nokia represented some 90 percent of Finnish ICT R&D and close to 50percent of the national R&D). These choices include extensive reorganizationand partial relocation.

The introduction frames these central issues of the study. The second chap-ter describes the preliminary cluster mapping; it assesses the economic impor-tance of the ICT cluster. The third chapter concentrates on Nokia’s role in theFinnish ICT cluster. The fourth chapter focuses on the dynamics of the ICT clus-ter, including competitive-, factor-, and demand-conditions; supporting and rela-ted industries; and public sector policies. In the past few years, innovation – inFinland, often understood as technology innovation – has been depicted as thenot-so-secret secret of the Finnish ICT cluster and a guarantee of the sustainedsuperiority of Finnish mobile communications. The fifth and last chapter addres-ses the inherent vulnerabilities of this argument, focusing on productivity, inno-vation, and new business formation in the Finnish ICT cluster.

From the Finnish standpoint, localization – not globalization – is the problemof the ICT cluster. Through most of the post-WWII era, the national innovationsystem has been geared to promote exports and foreign direct investment (FDI).The old trends of industrial development persist even today. The key govern-ment agencies continue to boost outward internationalization, whereas only asingle small agency has been mandated to attract foreign capital to Finland.More sensitive to rapid fluctuations in migration patterns, Finnish regions havegrown increasingly proactive in the past few years, seeking to protect and ex-pand their competitive base. Due to the impending problems of aging demo-graphics and the absence of highly-skilled foreign talent, these regions will find itdifficult attract to appropriate labor in the ICT clusters and others – in the absen-ce of extensive, timely and multifaceted measures.

In the past, Finnish efforts have been geared to strengthen the institutionalcapabilities of the national innovation system. Institutions, however, enable onlythe macroeconomic conditions of the cluster, whereas the success or failure ofthe cluster depends on its microeconomic conditions, i.e., sophistication of firms,attractiveness of business environment. Developing institutional capabilities isnecessary, but not sufficient. Competitive winners are not necessarily compa-nies that have the best credentials, but those that win.

Today, dynamic globalization poses entirely new challenges to the Finnishinnovation system, which was developed and which grew during the Cold Warera. Cluster studies must focus on the globalization drivers that illustrate Finnishdevelopments. These pressures are not marginal to the Finnish ICT cluster; theyare in its very core. For now, more than 99 percent of Nokia’s revenues originatefrom foreign markets, even though most of its R&D remains in Finland. In thefuture, this accomplishment will be extremely difficult to sustain.


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Yet, for most practical purposes, the lessons of Nokia’s success – in terms ofproductivity, innovation and new business formation – have been neglected.Such circumstances do not facilitate sustainable success in the Finnish ICT clus-ter.

Key words: cluster, ICT, globalization, innovation, wireless, competition


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Global Competition, Clusters andFinland´s Wireless Valley

In this Foreword, I begin with some thoughts about global competitiveness andcluster thinking. I also reflect on the Finnish mobile cluster, the subject matter ofDan Steinbock’s What’s Next? Finnish Mobile Cluster and Globalization. Thisrevealing and significant book promises to reshape the dialogue in Finland andshed light on an important case globally. It is certain to inform scholars and poli-cymakers in other countries.

Since the late 1990s, I have been involved with the annual Global Competiti-veness Report, published by the World Economic Forum. The Report is a tho-rough assessment of the comparative strengths and weaknesses of more than100 industrialized and emerging economies. According to the most recent reportof 2003 - 2004,

Finland retakes the leading position, after dropping to second placebehind the United States last year. Finland remains one of the world’smost remarkable success cases over the last decade.1

Despite many differences in history, size, as well as macro- and microeconomicconditions, United States and Finland hold the leading positions in the GlobalCompetitiveness Report. Still, the number, quality and drivers of the clusters inthese two economies are very different. And as What Next? argues, it is the clus-ter framework that may allow us better understand the nature of these differen-ces.

***

During the past decades, competitiveness has become a central preoccupationof both advanced and developing countries in an increasingly open and integra-ted world economy. Despite its acknowledged importance, the concept of com-petitiveness is often misunderstood. In 1986, I initiated the Competitive Advanta-ge of Nations (CAON) research project in the Harvard Business School, whichhas resulted in several waves of contributions, which in turn have inspired an

1 Porter, M.E. et al. (2003), The Global Competitiveness Report 2003-2004 (WorldEconomic Forum, Oxford University Press).


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entire research literature worldwide.2 Some 12 years later, we began an effort toexamine statistically the microeconomic foundations of competitiveness andprosperity across a wide array of countries. It has been a daunting task, given theneed to measure and compare the complex array of national circumstances thatsupport a high and sustainable level of productivity. Yet, we have aspired to pro-vide a framework to allow countries and companies to understand their detailedcompetitive strengths and weaknesses; to be as rigorous as possible; and totake into account different levels of development which pose different prioritiesand challenges.

I became interested in Finland as my initial book was being published andbecame part of the dialogue that took place in the early 1990s. In June, 1997, Ilectured in the International Virtual Conference of the Helsinki School of Econo-mics (HSE) on “The Competitive Advantage Research of the Nordic Countries”.3

By the time, I had already been personally involved in a large number of clusterefforts.

I titled my initial book The Competitive Advantage of Nations to highlight thecrucial distinction between comparative advantage and a broader concept ofcompetitive advantage as sources of wealth. Comparative advantage rests onendowments of inputs such as labor, natural resources, and capital. I arguedthat these inputs, and especially those inputs that we inherited, had become lessand less valuable in an increasingly global economy. Today, prosperity dependsmore on creating a business environment, along with supporting institutions, thatenable the nation to productively use and upgrade its inputs. The diamond fra-mework makes technology and innovation central to productivity growth, yet ittries to frame the environment for innovation in a far broader context than tradi-tional accounts focusing on science and technology.

My work suggests that competitiveness equals productivity. Productivity andcompetitive advantage in an economy require specialization. In The CompetitiveAdvantage of Nations, I introduced the concept of clusters, or groups of intercon-nected firms, suppliers, related industries, and specialized institutions in particu-lar fields that are present in particular locations. While the agglomeration of firmshas long been recognized in literatures such as economic geography and regio-nal science, the phenomenon was viewed narrowly, and not related to competiti-

2 The basic contribution inlude Porter, M.E., (1990). The Competitive Advantage ofNations (The Free Press, New York); Porter, M.E., (1998a) “Clusters and Competition:New Agendas for Companies, Governments, and Institutions” in Porter, M.E. (1998), OnCompetition (New York: The Free Press), pp. 197-271; Porter, M.E., (1998b) “CompetingAcross Locations,” in Porter, M.E. (1998b), On Competition (New Yor; The Free Press1999), pp. 309-348.3 Porter, M.E. (1998) “The Competitive Advantage of Nations – The Finnish Case,” inSteinbock, D. (1998), The Competitive Advantage of Finland (ETLA/SITRA 1998).


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veness and the process of international competition. The Competitive Advantageof Nations shows how clusters not only reduce transactions costs and boostcurrent efficiency but create collective assets in the form of information, motiva-tion, access to specialized inputs, among others. Arguably, more important thanthe benefits of clusters for current efficiency is their potential influence on inno-vation and new business formation.

***

Reflecting on CAON and the large body of subsequent work in many count-ries, there appear to be a number of essential conditions that are fundamental tosignificant improvements in competitiveness. Many were present in the emer-ging Finnish mobile cluster in the early 1990s, even if things changed toward theend of the decade. With the severe recession of the early 1990s, the sense ofurgency and unfreezing provided a great momentum and trigger for the Finnishprogress. Second, these years also witnessed an underlying consensus aboutwhat competitiveness means, particularly the recognition of the need to movefrom a macroeconomic to a microeconomic perspective. A third condition forprogress was cluster thinking, not only in the analysis but also in stimulating andorganizing action.

The appropriate role for the government is an issue that occupied much dis-cussion and debate in Finland later in the 1990s. In Nordic countries, a longhistory of egalitarianism is now confronting global competition with its imperativeof cost efficiency. We know that governments must strive to create an environ-ment that supports rising productivity. The idea that the government needs to beinvolved in the correction of market failures may be tempting. However, marketfailure logic can and is often twisted to justify unnecessary intervention, or thewrong kinds of intervention. As the Finnish mobile cluster demonstrates, sus-tained success requires often difficult strategic tradeoffs – not because they areideal, but because alternatives are worse.

***

Economic geography in an era of global competition poses a paradox. In theory,location should no longer be a source of competitive advantage. Open globalmarkets, rapid transportation, and high-speed communications should allow anycompany to source any thing from any place at any time. But in practice, locationremains central to competition. What Next? illustrates these basic facts, with theFinnish mobile cluster, Nokia and globalization. It explores the economic implica-tions of Finland’s Wireless Valley, Nokia’s role in the broader ICT cluster, and theever-deepening impact of globalization on Finland and its regions. Similarly,What Next? reviews the dynamics of the ICT cluster, from industry rivalry to factorconditions and public-sector policies. Throughout, Dan Steinbock focuses on


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the role of Nokia and other key firms. Indeed, the study argues that, while institu-tional development has been necessary in the mobile cluster, it is Nokia and itspartners that account for the success of the cluster. The book also makes a casethat the strong role of the public-sector actors in R&D and early-seed fundingmay be unwise and unnecessary.

Today’s economic map of the world is characterized by clusters: critical mas-ses in one place of linked industries and institutions - from suppliers to universi-ties to government agencies - that enjoy unusual competitive success in a parti-cular field. Like Silicon Valley, Hollywood, or Finland’s “Wireless Valley,” clustersdot the world’s landscape. They affect competition in three broad ways: first, byincreasing the productivity of companies based in the area; second, by drivingthe direction and pace of innovation; and third, by stimulating the formation ofnew businesses within the cluster. Competitive advantage lies increasingly inlocal things—knowledge, relationships, and motivation—that distant rivals can-not replicate.

In Finland, the impact of Nokia certainly led to increased productivity, accele-rating innovation and stimulation of new businesses. But as What Next? arguesand previous OECD studies have noted, these drivers originate from the relianceon a singular industry segment (mobile communications) and a single world-class company (Nokia’s extraordinary role in the Finnish ICT cluster and broadereconomy).4 Outside of Nokia, the drivers of productivity, innovation and new bu-siness are not quite as impressive. Moreover, macroeconomic policies continueto constrain a business environment that currently remains relatively domestic,in comparison to, say, Sweden or Denmark.

***

One of the key points that we have discovered in our research – and which moti-vates the approach and results of What’s Next? – is that most discussion of com-petitiveness and economic development is still focused on the macroeconomic,political, legal, and social circumstances that underpin a successful economy.Certainly, sound fiscal and monetary policies, a trusted and efficient legal sys-tem, a stable set of democratic institutions, and progress on social conditionscontribute greatly to a healthy economy. These broad conditions are necessary,but not sufficient. They provide the opportunity to create wealth; but as such,they do not create wealth.

Wealth can only be created at the microeconomic level of the economy; itstems from the sophistication with which companies operate in a location and thequality of the microeconomic business environment in which a nation’s firms com-

4 OECD, 2002, Territorial Reviw: ICT Clusters in the Greater Helsinki Region (OECD):Paris, 2002); OECD 2003 Finland: Country Survey (EOCD: Paris).


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pete. Unless these microeconomic capabilities improve, macroeconomic, politi-cal, legal, and social reforms will not bear full fruit. As What Next? argues, it isthese very same microeconomic conditions that illuminate the emergence andexpansion, as well as the future prospects of the Finnish mobile cluster and itsrole in the broader Finnish economy.

The Nordic countries have made remarkable strides in moving to a moremicroeconomic focus. Finland has generated a tremendous body of researchand helped drive quite a transformation in thinking. I welcome the opportunity tocontinue to learn and participate in the dialogue in Finland as the nation’seconomy evolves and develops.

Michael E. PorterProfessor

Harvard Business School

Preface

The study at hand – What Next?Finnish ICT Clusterand Globalization – exploresthe economic significance and dynamics of the cluster amidst globalization.

The new challenges of the Finnish ICT cluster stem from threats and opportu-nities driven by globalizing industry rivalry in mobile communications. Traditio-nally, Finnish cluster studies have favored an ‘inside out’ perspective, exploringthe clusters on the basis of domestic capabilities rather than actual firm perfor-mance. The present study emphasizes an ‘outside in’ perspective, exploring Fin-nish cluster developments from the standpoint of globalization and localization.By the same token, it underscores the role of firm performance as the primecriterion for cluster success or failure.

Due to its evolutionary context, the Finnish ICT cluster grew around Nokia.With the transition to digital cellular in the early 1990s, Nokia opted for a boldglobal focus strategy. Among the pioneering vendors and operators, it intensifiedindustry globalization, which has provided extraordinary opportunities to itscooperators and many other Finnish companies. With the transition to multime-dia cellular, Nokia has recently opted for still another new bold strategy.

As the environment has dramatically changed, organizational capabilitiesand strategy must change as well. Among other things, Nokia’s new strategyrelies on reorganization and partial relocation. In late 2003, the company optedfor reorganization, while relocating some functions in the United States. In the


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new environment, appropriate organizational capabilities as well as proximity tolead markets is critical to staying close to the productivity frontier. In the long run,Nokia’s strategic decisions may prove as important as the development of itsglobal focus strategy. In 1992, the industry was emerging and still domestic. To-day, strategic choices take place in a rapidly maturing and globalizing industryenvironment, and that makes all the difference.

In the late 1980s, Finnish firms and policy authorities did not participate in theinitial wave of the Competitive Advantage of Nations (CAON) research projects,which were initiated by Professor Michael E. Porter in the Harvard School of Busi-ness. Finland caught up with the cluster developments in the early 1990s, due tothe excesses of financial deregulation, the collapse of the Soviet Union and So-viet trade. After the most severe recession since the Depression, an urgent sen-se of crisis led to the joint efforts of the Finnish private, public and academicsectors to identify the Finnish clusters and accelerate upgrading and innovation.These efforts coincided with the dramatic rise of Nokia, which focused on mobilecommunications globally and divested all non-core properties. Concurrently, theFinnish ICT cluster evolved around Nokia.

Through the early 1990s, the new cluster-driven national strategy served torejuvenate the Finnish economy. Concurrently, European integration and sub-stantial increases in national R&D efforts, particularly by the private sector(Nokia’s role was and remains critical), contributed to the growth. With improvingconditions came a sense of complacency, not least because of Nokia’s extraordi-nary growth, which many domestic and international surveys identified with inc-reases in Finnish competitiveness. This correlation was understandable, butsuperfluous.

After mid-1990s, new public policies no longer reflected public/private con-sensus, but prompted increasing criticism from the Finnish industry. As the num-ber of cluster studies eclipsed, the focus of the national innovation systemshifted toward developing core competences and technology innovation. In theprocess, the key criteria of the original cluster framework and CAON studies –firm performance, productivity and innovation (i.e., innovation that may reflect inall value activities, not just in those of technology development) – were first down-played, then neglected.

All along, dissenting voices had noted the inherent problems associated withpioneer strategies and technologically-driven strategic advantages, especiallyin the ICT and mobile business. For all practical purposes, these voices wereignored. In a sense, it was only too human. Finland was enjoying a magnificenteconomic growth, Finnish companies were benefiting from a historical growthmarket, and international indicators touted the sophisticated capabilities andsuperiority of Finnish high-technology. How could anything be wrong?

It was the dramatic economic growth of the late 1990s that suppressed skep-


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ticism; until the stagnation of the worldwide technology sector made forgetful-ness impossible. During 2001 and 2002 an OECD ICT team noted inherent vul-nerabilities with the Finnish dual reliance (mobile communications, dominantfirm). These issues were ignored until the OECD country survey of 2003 broughtattention to what it considered the great Finnish challenges – an aging populati-on and the high ICT focus.

The Introduction frames the central issues of the study. The second chapterdescribes the preliminary cluster mapping; it assesses the economic importanceof the ICT cluster. The Finnish ICT sector is compared with the other Nordic ICTsectors. The third chapter concentrates on Nokia’s role in the Finnish ICT cluster.This is explored through the competitive stages of the cluster, Nokia’s role, publicpolicies and private strategies, and Nokia’s current rivalry for industry leader-ship.

In this study, the historical evolution of the Finnish ICT cluster – i.e., the com-petitive stages – is explored vis-à-vis the factor-driven, investment-driven, andinnovation-driven stages. The emphasis is on the mobile business in the contem-porary environment. The growth core of this cluster is the mobile industry. It isinconceivable without the extraordinary performance of Nokia, whose strategicdecisions are integral to the future of the Finnish ICT cluster.

Traditional cluster studies have emphasized the impact of public policy on thesuccess of the Finnish ICT cluster. The present study concurs that some of thesepolicies, indeed, nurtured and cultivated the emergence of Finnish mobile com-munications. But the most important influence have originated from Nokia’s digi-tal R&D and consolidation of Finnish electronics in the 1960s and 1970s, alongwith Nordic cooperation in the wireless, and deregulation of Finnish telecommu-nications in the early 1980s.

During the past two decades, the evolution of the ICT cluster has been drivenprimarily by Nokia and its cooperators (including contractors and sub-contrac-tors, software houses, IT firms). Since Nokia adopted its global focus strategy in1992, it has contributed to the globalization of the industry, while opening newopportunities to its cooperators. As globalization began to accelerate in the late1990s, the scale and scope of firm-level activities has proved insurmountable tomany of these cooperators and has forced others to consolidate.

This sequence of events is not specific to Finland, Nokia, or the mobile in-dustry; it is typical of globalization. From the Finnish standpoint, localization – notglobalization – is the problem of the ICT cluster. Through most of the post-WWIIera, the Finnish innovation system has been geared to promote exports andforeign direct investment (FDI). Only in 1993, when foreign ownership legislationwas reformed, did it become possible for foreign firms to participate in Finnishdevelopments. The old trends of industrial development persist even today; thekey government agencies continue to boost outward internationalization, whe-


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reas only one agency – which has fewer than 10 employees – has been manda-ted to attract foreign capital to Finland. This low degree of localization is reflectedin the proportion of foreign citizens in Finland (less than 2 percent, one of thelowest in Europe). Even worse, unemployment among foreigners remains over30 percent (more than 50 percent in the early 1990s).

More sensitive to rapid fluctuations in migration patterns, Finnish regionshave grown increasingly proactive in the past few years, seeking to protect andexpand their competitive base. In the process, the old ideals of (national) equityare fading, while the new ideals of (globalizing) efficiency are on the rise.

Unsurprisingly, these trends reflect in the evolution of the Finnish ICT cluster.Nokia’s global focus strategy has had a substantial impact on the internationali-zation of the cluster, and the same applies to its R&D and location decisions. In2001, the company accounted for some 90 percent of Finnish ICT R&D and al-most 50 percent of the national R&D. These are extraordinary figures in interna-tional comparison. Similarly, the geography of Nokia’s R&D has served as a signi-ficant driver for the Finnish growth regions, particularly in Salo, Oulu, and, to acertain extent, Tampere and Jyväskylä. But again, as the industry globalizes, thevendor must adapt to globalizing pressures. This scenario requires a fair amountof outsourcing in business processes and offshoring in locational advantage.These pressures first affected the infrastructure segment in the late 1990s; theirinfluence is increasingly felt in the handset segment as well.

The launch of the new segments – multimedia and enterprise solutions – wasaccompanied with the relocation of certain key functions (CFO’s office) and partsof cutting-edge units (enterprise solutions, multimedia) in New York. While suchdecisions have triggered some public debate in Finland, they are natural andconsistent with Nokia’s corporate strategy. They are not ideal; but the alternati-ves would have been sub-optimal. These strategic decisions have been pat-terned by globalizing pressures, which define competitive threats and opportuni-ties in the mobile business and the ICT cluster, just as they have dictated Nokia’sreorganization and partial relocation.

The fourth chapter in the present study focuses on the dynamics of the ICTcluster, including competitive-, factor-, and demand-conditions; supporting andrelated industries; and public sector policies. In the past, these conditions haveoften been explored on the basis of the potential or the capabilities of the Finnishnational innovation system. Here, the emphasis is on the most fundamental crite-rion of the original cluster studies – firm performance, productivity, and innovati-on. If the firms fail to perform, the potential of the system has not been actualized.Ultimately, it is performance and performance only that counts. Until recently,Nokia’s success has compensated for systemic deficiencies in the ICT cluster.But as the recent events in Finnish biotechnology demonstrate, such deficien-cies can have very adverse effects, in the absence of a successful flagship com-


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pany in the industry.Some additional trends warrant mention. In competitive conditions, Nokia’s

role has positively disciplined the players toward market-driven developments.Where the role of the public sector has been more central, trends have not run inparallel. Most importantly, delays in the privatization of the national telecom ope-rator, along with associated managerial problems, proved detrimental to the ex-pansion of the cluster. In contrast to hope and hype, the ICT cluster has notproved a magnet to foreign multinationals. In the late 1990s, a few multinationalslaunched new operations or expanded old ones to monitor Nokia’s activities andFinnish mobile communications more closely. With the stagnation of the techno-logy sector, some have already divested, and few have engaged in truly substan-tial investments.

Converse to past expectations, the activities of the Finnish ‘content industry,’along with those of leading media and financial firms, have remained domestic or,at best, regional. In factor conditions, the role of Nokia’s R&D and private R&Dhas grown substantially, through the 1990s. This trend is bound to continue but itwill also internationalize. Concurrently, the innovation system is regionalizing. Asregions increasingly exert pressure on nationally centralized bodies of publicR&D and risk capital, debate is likely to arise concerning the role, accountability,and transparency of these public-sector organizations.

In demand conditions, the role of the public sector will decline over time, giventhe increasing importance of regions in Finland and the regional implications ofever-deepening European integration. In the late 1990s, Nokia’s expansion pro-vided extraordinary opportunities to firms that operated within its influence sphe-re. As the globalization pressures increase, these strategic windows are fewer innumber and more demanding in kind. Global pressures come with requirementsof scale and scope that few Finnish firms can fulfill.

Because of Finland’s pioneer role in mobile communications, Finnish consu-mers can still play a role in Nokia’s R&D, assuming that these users reflect oranticipate future trends at a worldwide level. In this regard, however, the role ofconsumer demand is changing and less important than it was in the early 1990s,when mobile penetration in the most advanced OECD nations remained relative-ly low. Also, Finnish society is very homogenous and insular (ethnicity, religion,language), whereas the worldwide user base has grown – and will grow – increa-singly heterogeneous and multicultural. Today, diversity is often a strategic ad-vantage, but missing in Finland. Due to the impending problems of aging demo-graphics and the absence of highly-skilled foreign talent, regions will find it diffi-cult attract appropriate labor in the ICT clusters and others – in the absence ofdrastic, timely and multifaceted measures.

In the past few years, innovation – in Finland, often understood as technologyinnovation – has been depicted as the not-so-secret secret of the Finnish ICT


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cluster and a guarantee of the sustained superiority of Finnish mobile communi-cations. The fifth and last chapter addresses the inherent vulnerabilities of thisargument. It focuses on productivity, innovation, and new business formation. Asthese sub-sections demonstrate, the continued development of technology in-novation is a necessary, but not sufficient assurance of competitive success.

The weaknesses of the Finnish ICT cluster precisely reflect vulnerabilities inthese three important areas:

productivity (in the past, Nokia’s dramatic growth hid many of theseissues),innovation (in the past, success in GSM technology was enough, but asadvanced markets saturate, managerial and marketing capabilities ratherthan technology development matter ever more),new business formation (in the past, many new firms were portrayed ‘futuremini-Nokias’, but most have failed and none have delivered the expecta-tions).

In the past, Finnish efforts have been geared to strengthen the institutionalcapabilities of the national innovation system. But institutions enable the macro-economic conditions of the cluster, whereas the success or failure of the clusterdepends on its microeconomic conditions, i.e., sophistication of firms, attractive-ness of business environment. Along with input conditions and public policies,other conditions matter – and, in an era of globalization, matter ever more. Theseinclude competitive- and demand conditions as well as supporting and relatedindustries. Particularly in the mobile business, the industry value chain is drivenby specialization and globalization.

Developing institutional capabilities is necessary, but not sufficient. Competi-tive winners are not those that have the best credentials, but those that win.

Today, dynamic globalization poses entirely new challenges to the Finnishinnovation system, which was configured and grew during the Cold War era. Inthe ICT cluster, the pressures of regionalization rose dramatically in the digitalcellular era, whereas those of globalization have increased rapidly since the late1990s and with the 3G transition. Consequently, classic cluster studies that fo-cused on Finnish developments remain important, but are hardly sufficient ontheir own.

Today, cluster studies must focus on those globalization drivers that illustrateFinnish developments. These pressures are not marginal to the Finnish ICTcluster; they are in its very core.

Dan SteinbockNew York City

January 1, 2004


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1 Introduction

On September 10, 2003, Kari Vuorialho, President and CEO of Salcomp Oy, wascoming to the end of his interim report. The company, a manufacturer of powersupplies for personal handheld devices, is located in Finland’s northernmosttown Kemijärvi. Surrounded by lakes and Kemijoki the largest river of Finland,Kemijärvi has only 10,500 inhabitants (2.7 inhabitants / km²). The town is home tosome industry, agrobusiness, forestry, and tourism. It has served as the homebase for a modernized pulp factory of Stora Enso, a door factory of North EastWood, and high-tech firms, such as Salcomp and Polarcomp. But things arechanging. “Salcomp has invited personnel representatives to discuss the plan totransfer all charger manufacturing to China,” said Vuorialho as the layoffs of 280Finnish employees were announced. “Personnel reductions are a consequenceof the plan to close down Salcomp’s charger production in Finland in spring2004" (Salcomp 2003).

Since the late 1990s, Salcom’s internationalization in China, Mexico, and Bra-zil had followed that of Nokia (Exhibit 1-1). The Salcomp Shenzhen plant inChina, with 2,200 employees, manufactured linear and switch mode power supp-lies and related components. The plan to transfer the charger manufacturing toChina was based on the favorable cost structure in China and strong marketgrowth in Asia. Salcomp had been the only remaining mobile phone charger ma-nufacturer with production in Europe. While the company’s R&D, sales & marke-ting, and headquarter functions would remain in Finland, the reallocation of pro-duction was intended to strengthen Salcomp’s position and competitiveness inthe growing power supply market for personal handheld devices. Despite thecompetitive logic, many Finns were stunned by Salcomp’s fate. How was it pos-sible?

At the turn of the 1990s, Finland had overcome a severe recession. In just adecade, this small Nordic country had remade itself as a high-tech leader in , notleast because of the explosive growth of Nokia and Finland’s Wireless Valley.According to the most recent Global Competitiveness Report by the World Eco-nomic Forum, Finland was once again the “most competitive nation in the world.”In effect, the new report called Finland one of the most significant success storiesof the decade. It was not the only international indicator to recognize Finland’scompetitive success and innovation performance. In 2003, the Institute for Ma-


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nagement Development (IMD) rated Finland the most competitive economicarea with a population under 20 million. And, out of 82 economies ranked in theGlobal Information Technology Report 2002-2003, Finland placed first in Net-worked Readiness Index. Until recently, many of the leading Finnish corporateCEOs, public-sector policy-makers, and academic researchers had put theirfaith in information and communication technology (ICT), which they saw as fue-ling an ongoing “third industrial revolution.” In the past, competitiveness studieshad defined national self-perceptions. Now a gap was deepening between com-petitive indicators and national concern about offshoring, layoffs, and the co-ming crisis of the welfare society.

Exhibit 1-1 Salcomp’s Growth Years

1975Salcomp started operation in summer 1975.The main products of the Kemijärvi plantincluded stereo modules and TV tuners.

1982Power supply production was started andSalcomp continued to modernize its production.The in-house design and production ensuredthat all products were equipped with the bestcomponents available.

1983Nokia acquired Salora (inclusive of Salcomp).

1985Salcomp expanded the Kemijärvi plant. Thesignificance of the power supply businessincreased steadily.

1988Mass production of the world’s first switchmode charger for CMT began.

1992First automated manufacturing line was used.

1995Salcomp received the ISO 9001 quality certifi-cate. The company focused on chargers andpower supplies for the telecommunicationsindustry and divested its TV-componentbusiness.

1997Customer service centers founded in Hong Kongand Dallas, TX.Salcomp expanded the Kemijärvi plant inresponse to the increasingly high demand formobile phone chargers.

1998Salcomp started the production of chargers inChina.

1999EQT Scandinavia II equity fund acquired Sal-comp. Salcomp received the ISO 14001 environ-mental certificate, and production was started inMexico.

2000Salcomp expanded its operations to Brazil bystarting charger production in Manaus.

2001Presence in the Brazilian market was strengt-hened with the opening of a customer servicecenter in Sao Paulo.

2002Salcomp acquired Aspro Technology AG andlinear adapters became an essential part of thecompany’s business.

2003The expansion of the Shenzhen plant tripledSalcomp’s production capacity.


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To many, the closure of the Salcomp plant was not only a terrible blow to thetown of Kemijärvi, but a prologue of an uncertain future in Finland. “In the mor-ning you are in contact with China,” the CEO reflected asking for a glass of water,with eyes in tears and a trembling voice. “During the day it is Europe, and in theevening you talk with people in Brazil. Then you go outside and walk down thequiet streets of the town. The nature is beautiful here, but...” The plant was loca-ted in Lapland’s beautiful Nordic wilderness but was thousands of miles awayfrom the core clusters and lead markets of the mobile business. Salcomp’s Fin-nish employees now saw themselves in the geographic periphery of the world,marginal, redundant, and obsolete. And as offshore production promised to es-calate worldwide, many Finns shared the uneasiness about the future.

Only a few years ago, the Finns had perceived themselves as industryleaders eager to trade with China. They had technology, China had markets. Itwas a win-win situation, not so different from trading with the Soviets. But the ColdWar era was over. Finland was now part of the European Union, yet its ICT firmscompeted in high-tech industries dominated by the United States. China was notthe Soviet Union. Foreign direct investment had accelerated since the early1980s and, each month, the Asian powerhouse was creating five million newwireless subscribers – equal to the entire population of Finland. Amidst globaliza-tion, large multinationals could protect themselves, but small and medium-sizecontractors and other Finnish ICT firms relied on very few clients, if not on Nokiaalone. In these gloomy scenarios of loss and failure, free trade played no role.Most observers acknowledged that Vuorialho had no alternative to relocating theplant. The Kemijärvi operations were not shut down just because production ischeaper in China; there were also significant differences in the total cost of labor,raw materials, logistics, and machinery. Nor was the real issue about Salcomponly. Rather, the plant’s fate reflected the efforts of Finland’s Wireless Valley tocope with the rapidly changing environment.

ICT activities may be highly localized, generating different development pathsin different economies. Despite the volatility of the technology sector, Silicon Val-ley, since the late 1980s, has captured the interest of those studying how ICTclusters are re-shaping regional and even national economies (Saxenian 1994).In a similar way, Finland’s Wireless Valley has attracted great attention. Will thiscluster thrive beyond singular technology generations, or will it fail?

The wireless cluster – or more broadly the ICT cluster – has been the fastestgrowing cluster in Finland. It is also the first major Finnish cluster in which theimportance of raw materials is secondary to that of knowledge. In the mid-1990s,national research initiatives concluded that the future of Finland rested on thiscluster that “will become one of the cornerstones of the Finnish economy, along-side the traditional industries of forest and metal. Behind this scenario, there isthe phenomenal growth in global demand” (Hermesniemi et al. 1994). All along,


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however, dissenting voices had noted the inherent problems associated withsimple pioneer strategies and technologically-driven strategic advantages(OECD 2002, 2003; Porter 1998, 2001; Steinbock 1998, 2001a-b, 2002a-b).The dramatic economic growth of the late 1990s suppressed skepticism – untilthe burst of the Internet bubble and mobile mania in 2001 and 2002 (Steinbock2003c).

Until the early 1990s, the Finnish innovation system remained relatively clo-sed because of the politics and economics of the Cold War era. Similarly, until thechange of ownership legislation in the early 1990s, foreign direct investmentremained minimal. Since then, change has been rapid. However, dynamic globa-lization poses entirely new challenges to the Finnish innovation system, whichwas developed in the Cold War era. The pressures of regionalization rose dra-matically in the digital cellular phase, whereas those of globalization have inc-reased rapidly since the late 1990s.

As demonstrated by What Next? Finnish ICT Cluster, Nokia and Globalizati-on, the new challenges stem from threats and opportunities driven by globalindustry rivalry. These issues have already resulted in Nokia’s reorganization,which was undertaken to enhance internal strengths and overcome strategicweaknesses. These changes are as important as the development of Nokia’sglobal focus strategy in 1992. But they take place in a globalizing industry envi-ronment, which makes all the difference. The Finnish ICT cluster evolved aroundNokia. It is not just a national treasure; it is also a company capability. The presentstudy details the economic significance and dynamics of the Finnish ICT cluster,including the role played by Nokia, amidst dynamic globalization.


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2 Finland´s Wireless Valley: Nokiaand ICT Cluster Identification

“Ah, it’s a great time to be Finnish,” noted Newsweek in the summer of 1999. Theprevious winter, Finland’s flagship company, Nokia, had captured the leadershipin mobile communications, powered by sales that grew 51% to $15.7 billion in1998. In relative terms, Finland led the world in both Internet connections andmobile phones per capita. “Finland has a national knack for mobile communica-tions and information technology—and a vision for combining the two,” conclu-ded Newsweek. “The future is Finnish” (Newsweek, 1999). In October 2001, ac-cording to the World Economic Forum’s competitive review (WEF, 2001 - 2002),

Finland, for the first time, ranks first in the world, indicating that it now has thebest prospects for growth over the next five years. This country’s remarkableturnaround over the past decade serves as evidence of how quickly aneconomy’s prospects can be transformed by strong political institutions,a focus on technology, and sound macroeconomic management.

In reality, Finland’s high ranking in national competitiveness may have ref-lected Nokia’s driver role in the economy. Also, the assumption of the best short-term growth prospects was hardly valid. If the combined results of Nokia andSonera, Finland’s former telecom monopoly, provide a rough indicator of thecluster competitiveness, Nokia’s record market capitalization was $300 billionand Sonera’s was $50 billion in 2000. With the release of the WEF report a yearlater, Nokia’s market cap amounted to $83 billion and Sonera’s was $5.4 billion.Due to the bust, more than $262 billion of the combined market capitalization hadalready dissipated. Between 1997, when Nokia’s dramatic growth became knownin international markets, and 2001, when the wireless sector crashed, thenotions of “Finnish competitiveness” and “Finland’s Wireless Valley” blurredbeyond recognition. Compare, for instance, a famous report from the New YorkTimes in early 1997, and another wearier one half a decade later.

This Nordic country is the most wired nation in the world. Banking, shoppingand socializing are migrating from the real world into the virtual one at afaster rate here than anywhere else; the habits that distinguish high-technology centers like Silicon Valley in Northern California or Redmond,Washington, are a national phenomenon here. (Ibrahim 1997)


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A decade or so ago, this icy outpost on Russia’s flank was in deep trouble…Then, according to Finland’s modern mythology, came a business-classcaped crusader… That company was Nokia. As the decade progressed,Nokia advanced its multinational interests and expanded its work force, be-coming the engine of Finland’s economy, representing two thirds of thestock market’s value and a fifth of the country’s total exports… Thecompany’s $25 billion in annual sales roughly equals the entire budget ofthe Finnish government, which finances one of the world’s most-generouswelfare states. (Cowell 2002)

After the mid-1990s, the Finnish focus on the ICT sector, particularly the wire-less, was not without risks. “Finland is putting all of its eggs in one basket,” notedBruno Giussani, director for online strategy at the World Economic Forum inGeneva. “So far, it’s been an effective strategy, but it can also be very dangero-us. It puts the whole national economy in a fragile situation” (WSJ, 1999). Similarobservations had been made even earlier. However, until the slowdown of 2001-2002, these ideas were downplayed by the received wisdom in Finland and theinternational press. Nokia’s hypergrowth was not the problem; the lack of diversi-fication in the Finnish economy certainly was. From the late 19th century to thelate 20th century, two major clusters, wood/paper and metals, dominated thelandscape of Finnish industry. By the mid-1990s, the telecom/mobile sector wasthe fastest growing cluster in Finland (Hermesniemi et al., 1996). This clustercomprises quite heterogeneous industries, and the growth differentials amongdifferent segments can be significant. The cluster boundaries may be under-stood broadly, but the cluster drivers make or break its expansion. Most impor-tant, as indicated by the rapid rise and decline of market capitalizations, when themobile growth core is taken away, the entire ICT cluster may crumble.

2.1 Cluster Mapping

A cluster is a geographically proximate group of interconnected companies andassociated institutions in a particular field, linked by commonalities and comple-mentarities. The geographic scope of a cluster can range from a single city orstate to a country or even a network of neighboring countries. On clusters andnational competitive advantage (see Porter 1990, pp. 69-73). Finnish resear-chers rely on the broad definition of the cluster, which is known as the informationand communications technology (ICT) cluster (Ali-Yrkkö et al. 2000, Hernesnie-mi 1996, Paija 2001, Hernesniemi 2001). For most practical purposes, this defini-tion aggregates traditional telecommunications, wireless and IT segments. It also


29

associates technology convergence with industry convergence, whereas, in rea-lity, the linkages between these industry segments are still evolving and oftencomplicated. In certain cases, drivers of value activities may be quite different inthe two segments, as well.

The positive aspect of a broad definition is inclusiveness; it incorporates newand emerging, as well as old and maturing segments. The negative tradeoff isthat, building (and extrapolating) on the historical record of barely 5 to 10 years,such a definition may downplay the strategic role of the mobile growth core, whileidentifying Nokia’s success as “Finnish” success. This is a modern-day variationof the fallacy of composition, i.e., arguing that what is true for the parts is also truefor the whole. In cluster studies, the assumption is that what reflects an individualcompany (Nokia) also reflects the entire cluster (Finnish ICT cluster), or even themacroeconomy (Finnish competitiveness). Starting in the late 1990s, severalcluster studies, not to speak of policy recommendations based on those studies,have relied on such errors of judgment.

The extraordinary focus of the Finnish ICT sector on a singular industry (mo-bile communications) has occurred alongside the equally extraordinary domi-nance of a single company (Nokia). This dual reliance must be incorporated intothe framework of analysis; it was seldom considered through the growth years ofthe 1990s. Otherwise, the analysis may mistake firm-level competitive advanta-ges (Nokia) with cluster advantage (Finnish ICT cluster), or even national advan-tages (Finnish competitiveness). Only when the OECD began to pay increasingattention to the issue, first through a review of the Finnish ICT cluster (OECD2002) and later through the annual country survey (OECD 2003), was this prob-lem acknowledged in Finland. In the study at hand, the issue will be explicitlyaddressed.

According to the cluster framework (Figure 2-1), the sources of locationalcompetitive advantage comprise competitive conditions and related/supportingindustries, as well as factor and demand conditions (see Porter 1990, 1998). InFinland, the core of the ICT cluster comprises the role of Nokia in mobile hands-ets, networks, multimedia and enterprise solutions. Factor specialization inclu-des the relatively high-level educational system and the scientific and technolo-gical infrastructure. Moreover, the public-sector agencies of the national innova-tion system, which were created in quite different circumstances from the late1960s to the 1980s, continue to play a central role. According to proponents,these agencies facilitate the emergence of new technologies, products and ser-vices; according to critics, they can crowd out potential new players.

Nokia dominates the competitive conditions. However, because the companyhas not fully integrated the value chain, it has also given rise to quite a few do-mestic players, strengthened the role of operators, promoted competition andconsolidation, and accelerated the expansion of related and supporting in-


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dustries, especially a critical mass of capable local suppliers. On the other hand,rapid cluster expansion has also highlighted a variety of constraints, includingdifficulties associated with new enterprise formation and small venture capitalindustry, and inexperience in international business and globalization. In turn,the highly advanced wireless infrastructure has evolved hand in hand with so-phisticated and demanding local customers, whose needs – at the height of theGSM revolution in the late 1990s – anticipated those elsewhere. The competitivecircumstances have shifted with the early 3G transition. Furthermore, the Fin-nish cluster has proved slower than its Asian counterparts in accommodatingnew technologies (broadband, digital TV). Finally, the highly homogeneous andmonocultural Finnish population provides little guidance to the usage patterns inthe increasingly heterogeneous and multicultural mass markets.

Figure 2-1 Finnish ICT Cluster: Products and Services

- ICT Equipment: terminals, network systems- ICT multimedia- ICT enterprise solutions

- Contractors (ODM, EMS, contract manufacturing, parts & components)- Telecom access and services- IT equipment and services- Wholesale trade

- Pioneering public-sector markets- Sophisticated corporate markets (incl. operators, local services)- Early-adopters in consumer markets

Education- Public educational services- Public university system- public/private partnerships in R&D- Science parks- Strong S&T support- Public internationalization and SME services

- Public/private VC - Media- Business services - Adverting

- Banking services- Health services

Context forFirm Strategyand Rivalry

Factor (Input)Conditions

DemandConditions

Related andSupportingIndustries


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2.2 Relevance of the ICT Cluster

The 1990s began with a severe economic crisis for Finland. The collapse of theformer Soviet Union substantially reduced the nation’s exports. Concurrently,Nokia was swept by a severe strategic and financial crisis. With recession, theFinnish GDP declined by 10% between 1991 and 1993, unemployment reached16.6% in 1994, and the government experienced a substantial budget deficit.The economy expanded significantly in the second half of the 1990s, led chieflyby the hypergrowth of Nokia and the ICT cluster. Concurrently, the Finnish ICTcluster grew around and reliant on a relatively narrow segment of the ICT sector(due to Nokia’s focused strategy), just as it became reliant on a single company(due to the powerful role of Nokia in the country’s ICT cluster). Neither reliancenecessarily implies the other, but it was this combination that made the Finnishcompetitive situation unique and, in adverse circumstances, vulnerable. The ot-her side of the story is that, through the 1990s, Nokia’s hypergrowth providedextraordinary growth opportunities and strategic windows to a wide variety of itsFinnish cooperators.

According to the key economic indicators, the Finnish ICT cluster employedsome 77,000 people in 2000 (Table 2-1). Nokia alone employed 24,500 peoplein Finland and thus accounted for some 32 percent of total cluster employment.1

In fact, Nokia’s cluster effect is even more focused. In the total ICT employment,Nokia represents ICT manufacturing, which employed 45,100 people in 1998. Asa result, Nokia’s proportion of the ICT manufacturing amounted to 54 percent. Ifthe subcontractors in Finland were included, Nokia’s combined direct and indi-rect employment effect would cover most of the ICT manufacturing in the Finnishcluster.

The Finnish ICT cluster included about 6,500 firms, with almost 3,900 in ICTconsultancy services. The turnover amounted to EUR 40 billion, with EUR 24.5billion in ICT manufacturing. The gross value added of the cluster was over EUR11 billion. ICT manufacturing dominated the cluster accruing more than 60 per-cent of the value added, while telecommunications services represented almost17 percent. The importance of software supply and other IT services is underes-timated because ICT equipment includes a significant amount of software, andthe construction of telecom networks involves IT services that are included in thesales of the equipment manufacturers.

1 The actual employment impact is greater, due to a multiple effect. In 1998, for instance,Nokia employed indirectly an additional estimated 14,000 persons, vis-à-vis its first-tiersubcontractor firms (Ali-Yrkkö et al., 2000).


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Table 2-1 Key Economic Indicators of the Finnish ICT Cluster (2000)

ICT ICT Services Total ICT Total

Manu- Whole- Tele- Con- Services Manu- Services Privatefacturing sale com sultancy facturing Activities Sector

Employment 45,123 16,703 18,775 32,376 67,854 423,492 666,562 1,222,549(#)Enterprises 687 1,688 246 3,870 5,804 25,687 131,574 197,589(#)Turnover 24,491 7,913 4,824 3,553 16,290 102,233 131,818 249,581(Euros, Mil.)Value added 6,650 1,142 1,896 1,506 4,545 30,775 32,272 68,153(Euros, Mil.)

Total

Telecom Cons’er Com- Electron. Office Measrng ICT Foreign ForeignEqmnt Electron.puters compnts Mchnry Instrum. Trade Trade

Exports 8.62 0.14 0.36 0.48 0.02 0.74 10.37 47.68Imports 2.04 0.37 1.37 1.77 0.14 0.49 6.18 35.64Balance 7.58 -0.23 -1.00 -1.29 -0.12 0.25 4.19 12.04

(1,000.000 EUR)

SOURCE: Nordic Information Society Statistics 2002, Nordic Council of Ministers(Helsinki: Yliopistopaino 2003)

Localization: Structure and Scope of the ICT Sector inFinland

In terms of employment, the combined size of the ICT sector in the five NordicCountries amounted to 510,000 employees in 2000, with about 6 to 9 percent oftotal employment in the private sector. The ICT sector has grown more rapidlythan the private sector in general since 1994. In Finland, the share of manufactu-ring in both total and ICT sector employment is the highest among Nordic count-ries. The “Nokia effect” in Finland and the “Ericsson effect” in Sweden accountfor the critical role of ICT manufacturing. Finally, the ICT services sector repre-sents 10 percent of total employment and 12 percent of total turnover in theservice sector in Finland.

2 This section draws from Nordic Information Society Statistics 2002, particularlyChapter 6. Finnish data originate from Statistics Finland.

2


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Employment in the ICT Sector

Amidst the severe recession in the early 1990s and the accelerating competitionin telecommunications, the ICT cluster maintained higher employment rates thanthe economy as a whole. Between 1990 and 1994 Sonera (formerly TelecomFinland) reduced personnel by over 40 percent, whereas Nokia’s expansion pro-vided employment opportunities compensating for the outflow from the operatorsector. Neither ICT firm had to compete for high-skilled employees, unlike today.By 1998, Sonera’s employment returned to the 1990-level. However, only threeyears later, the burst of the telecom bubble reversed the employment effect yetagain. According to Paija (2001), “The timing of Nokia’s expansion was ideal forboth the economy and the company.” Certainly, the growth was beneficial, but italso shifted the composition of the ICT cluster toward manufacturing. The morequickly Nokia globalized, the more it would attract global competition. With hand-sets, this escalated price pressures and commodification by 2001 and 2002.

Compared to the overall economy, the ICT sector was characterized by rapidgrowth in employment during the second half of the 1990s. Job creation waslargely a result of growth in ICT services (particularly high growth in ICT consul-tancy services), but in Finland ICT manufacturing also showed fast growth inemployment. Except for Finland, growth in employment in ICT wholesale tradehas been modest.

Manufacturing. Of all the persons working in ICT manufacturing in the Nor-dic countries in 1999, 48 percent were employed in the Swedish and 30 percentin the Finnish ICT manufacturing industry.3 At the Nordic level, manufacture oftelevision and radio transmitters and telecommunications equipment is by far thelargest ICT industry (50 percent of ICT manufacturing employees in 1999), follo-wed by the manufacture of instruments and appliances for measuring (20 per-cent). There are significant differences at the national level. In Finland, the ICTmanufacturing employment concentrates in the manufacture of telecommunica-tions equipment (67 percent of ICT employment in 2000), with manufacture ofelectronic valves and tubes as the second largest industry (12 percent).

Services. Of the total number of persons employed in ICT services in theNordic countries in 1999, 39 percent worked in Sweden, 22 percent in Denmark,20 percent in Norway, 18 percent in Finland and 1 percent in Iceland. ICT consul-tancy services constitutes the largest service sub-sector in the Nordic countrieswith a 44 percent share of total employment in the ICT services sector. In Finland,ICT consultancy services accounted for 48 percent of employment in ICT servi-ces 2000. Telecommunications was the second largest sub-sector with 28 per-cent (18,800 of ICT services sector employees).

3 The remaining persons were employed in Denmark (14%), Norway (8%), and Iceland(0.1%).


34

According to the ICT employee profiles, the ICT manufacturing industries at-tract the average female share in manufacturing industries, whereas in serviceactivities this share is lower. In telecommunications, the proportion of femaleemployees is the highest (42 percent in Finland). At the Nordic level, personsemployed in the ICT sector are generally younger than those employed by theprivate sector as a whole. Highly educated employees have at least tertiary leveleducation. Their proportion is high in both the ICT manufacturing industry (clear-ly higher than in manufacturing as a whole in all Nordic countries) and in the ICTservices sector, thus reflecting the knowledge-intensive nature of the ICT sectorand its employment.

Economics of the ICT Sector

It is the economics of the ICT sector – turnover, value-added, wages and salaries– that make it so critical to the private and public sector alike.

Turnover. The total turnover of the ICT manufacturing industries of the Nor-dic countries amounted to EUR 59 billion in 2000.Sweden accounted for 46 per-cent, followed by Finland at 41 percent.4 Reflecting national employment pat-terns, the ICT manufacturing industry in Finland is relatively largest at 24 percentof the total turnover of the industry, compared with 16 percent in Sweden and 5 to6 percent in Denmark and Norway.5 The total turnover of the ICT services sectorin the Nordic countries amounted to EUR 97 billion in 2000. Sweden representedthe largest share with 38 percent, followed by Denmark (23 percent), Norway (21percent), Finland (17 percent) and Iceland (0.8 percent). Measured by its shareof the total turnover of all service activities, the ICT sector accounted for 11 to 13percent in the Nordic countries. ICT wholesale trade was by far the largest sub-sector of ICT services in all the Nordic countries, (5 to 7 percent of the total).6 Thedevelopment of employment in the Nordic ICT sectors reflected the growth of thelate 1990s, particularly in Finland where the turnover in nominal terms grew four-fold from 1995 to 2000 (in Sweden the turnover in ICT manufacturing more thandoubled). The ICT services sector also exceeded the rate of growth in the totalprivate sector in the Nordic countries, even if the growth was slower than in ICT

4 Remaining amounts were Denmark 7%, Norway 5% and Iceland’s 0.03 %,respectively.5 For Sweden and Finland – the two countries with the flagship companies (Nokia,Ericsson) and thereby the largest ICT manufacturing sectors – ICT manufacturinggenerates a share of turnover exceeding that of employment, whereas with Denmarkand Norway the two shares are about equal.6 In Finland, Iceland and Norway, telecommunications represented the second largestICT service sub-sector in terms of turnover, while Sweden was characterized by arelatively large importance of ICT consultancy services.


35

manufacturing. The increase in turnover was the largest in ICT consultancy ser-vices. In Finland the telecommunications sector also showed large growth in tur-nover.

Value Added.7 Based on the 1999 figures, Sweden generated 41 percent ofthe gross value added of the ICT manufacturing sector in the Nordic countries,Finland 40 percent, Denmark 11 percent and Norway 7 percent. In ICT services,Sweden generated 41 percent of the gross value added, slightly more than itsrespective share of 36 percent of the turnover. Norway accounted for 22 percentof the total gross value added (share of turnover 26 percent), Denmark 20 per-cent (share of turnover 22 percent), and Finland 17 percent (share of turnover15 percent).

Wages and Salaries.8 In 1999, Sweden accounted for 45 percent of thewages and salaries in ICT manufacturing at the Nordic level, which nearlyequaled its share of employment (48 percent). The same pattern applied to theFinnish ICT manufacturing industry. In all the Nordic countries, the average wageper employee was higher in ICT manufacturing than in the manufacturing in-dustry as a whole. The ICT services sector accounted for a larger proportion ofwages and salaries relative to employment compared with the services sector asa whole. In the ICT wholesale trade, the discrepancy in favor of wages and sala-ries was the largest in Denmark (5 percent of employment against 6.5 percent ofwages) and Finland (2.5 percent against 3.8 percent). In telecommunicationsthe relative share of wages and salaries compared to the share of employmentdemonstrated minor differences across countries. In ICT consultancy servicesthe gaps between the shares of employment and those of wages and salarieswere greater than in the two other sub-sectors of ICT services.

Globalization: Production and Foreign Trade of ICT Goods

In the ICT cluster, the increasing impact of globalization is reflected in the produc-tion and foreign trade of ICT goods.

Production of ICT Goods

Of the Nordic countries, Finland and Sweden have the highest proportions ofICT production of their total manufacturing production. From 1998 to 2000,

7 Value added refers to the earnings that are left to pay the production factors of laborand fixed capital. Gross value added reflects the profitability of the sector.8 Wages and salaries are difficult to compare across countries; they can only beanalyzed only in relation to their share of employment at the level of each sub-sector.


36

growth in ICT production in Finland was rapid. The proportion of ICT products ofall manufacturing production rose from 11 to 16 percent. In Sweden (1999–2000)the corresponding proportion was around 12 percent. In Finland 93 percent (!) ofICT production consisted of telecommunications equipment, which was also evi-dent in Swedish ICT production (83 percent). As noted earlier, in both countries,the rapid growth and the dominance of the ICT production stemmed from the roleof their respective flagship companies(Nokia, Ericsson). By the same token, newcompetitive realities – intensifying rivalry, disruptive innovation, dynamic rene-wal of advantages, and so on –threaten the two flagship companies, reflectingthe vulnerabilities of the entire ICT sector in the two economies.

ICT Exports and Imports

Not surprisingly, Finland and Sweden were the two Nordic countries where theICT sector was significant in economic performance as measured by foreign tra-de. In the latter half of the 1990s, the volume of exports of ICT products, as well asICT exports as a proportion of total exports and imports, increased in all the Nor-dic countries. The year 2001 marked a turning point, as the volumes and propor-tions of the ICT products fell. The most visible change took place in Sweden,where SEK 50 billion, or one third of the volume, of ICT exports vanished in 2001.Concurrently, Ericsson was swept by a severe financial crisis. In Finland, too, theproportion declined significantly, from 25 to 22 percent and the volume fell byEUR 2.1 billion. Despite the downward trend, ICT products still represented thehighest proportion of total exports in Finland (22 percent) and Sweden (13 per-cent) in 2001 – not least because of Nokia’s strategic ability to maintain a veryhigh market share in the handsets and against traditional competition (Motorola,Siemens, Sony-Ericsson), Asian players (Samsung, Kyocera), and U.S.-basedIT entrants (Microsoft, Intel) (see Steinbock 2002, 2003a).

Imports of ICT products as a proportion of total imports is somewhat higher inFinland and Sweden than in the other countries, primarily because of the electro-nic components, which were imported and then used in the manufacturing oftelecommunications equipment. The total volume of foreign trade (exports plusimports) in ICT products in 2001 remained the largest in Sweden at EUR 21,712million (39 percent of the total ICT foreign trade of the Nordic countries). A yearlater, the corresponding figure for Sweden was EUR 32,274 million. In Finland,the total volume of foreign trade in ICT products decreased from EUR 19,369million in 2000 to EUR 16,553 million in 2001. The balance between ICT importsand exports from 1997 to 2001 demonstrated the greatest surplus in Finland,where the exports/imports ratio was 1.7 in 2001. Despite a decrease in the sur-


37

plus in 2000, the exports/imports ratio in Sweden was about 1.0, while it had been1.2 to 1.4 several years earlier.9

In Finland, the largest export group was telecom equipment, which accountedfor 67 percent of the total value of Finland’s ICT exports in 1996 and 83 percent in2001.Some 18 percent of total Finnish exports were telecom equipment. Thelargest product groups in Finnish ICT imports were telecom equipment, electro-nic components, and computers. In addition to telecom equipment, instrumentsand equipment show a surplus as well, while all the other categories are importedmore than exported. The total balance of Finnish foreign trade has been positiveand grew continuously up to 2000, after which there was a slight decrease.

In the 1990s, the pace and intensity of growth in the Finnish electronics in-dustry was extraordinary. It contributed to the restructuring of the forest and me-tal based economy, in which knowledge replaced capital, raw materials, andenergy as the dominant factors of production. The share of electronics andelectrotechnics exports almost tripled at the expense of pulp and paper and me-tals, representing close to 30 percent of the total manufacturing exports (Figure2-2). Between 1960 and 1980, the volume of Finnish exports climbed from EUR0.5 billion to EUR 8.6 billion. As the Cold War era came to close, the Finnishscience and technology policy investments rose and Nokia’s dramatic expansiontook off; the volume grew more than five-fold, climbing to EUR 48.6 billion in 2000.In the aftermath of the market bubble, the volume has declined, yet it remainsrelatively high. “During the past decade,” argues one observer, “Finland becamethe world leader in high-tech trade surplus (high-tech exports/imports ratio)among indigenous high-tech producers” (Paija 2001). This dramatic expansionwas not due to the growth of multiple Finnish high-tech firms. Nor was it a functionof national competitiveness The great growth of the Finnish electronics industrywould have been inconceivable without the critical role of Nokia.

In a 1997 OECD comparison, Finland ranked second in ICT exports speciali-zation after Japan, sharing the same position with the United States. Japan andthe United States focused on IT, Finland on telecom equipment. Limiting the com-parison to telecom exports, Finland ranked first in specialization in the OECD in1998.10 But unlike Japan and the United States, Finland was a small economy. It

9 With these two flagship companies, the trade of Finland and Sweden had a “look andfeel” of the Asian powerhouses. The exports/imports ratio of ICT products seldomreaches 1.00, but in countries like Japan and Korea, the ratio has traditionally been high.In reality, the parallel is deceptive, due to very because of the different cost structure andwelfare society in the Nordic countries.10 During the 1990s, Japan lost its lead to Finland and Sweden. In absolute terms, theshare of Sweden and Finland in total OECD telecom equipment exports was 9.5 and 4.4per cent respectively in 1997, by which they reached the fourth and the seventh positionin cross-country comparison

1 2 412

3228

14

2325

31

2427

42

40 30

31

22 21

2716

15

86

6

1619

26

18 16 18

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1970 1980 1990 2000 2002

%

Other

Mechanical Wood Industry

Paper Industry

Metal and Engineering Industries

Elecronics and Electrotechnics industry

SOURCE:

National Board of Customs

Total Exports 0.5 1.5 8.6 16.8 48.6 46.0

(EUR Bil.)


38

Figure 2-2 Finnish Industry Groups: Export Shares (1960-2002)

had only a handful of world-class multinationals and two to three world-classclusters. The growth of the U.S. economy did not rely on General Electric, just likeJapan’s economic growth did not stem only from Sony. Contemporary observerstouted the merits of the specialization but ignored the tradeoff. In the absence ofgreater diversification, Sweden’s reliance on Ericsson proved costly in adversecircumstances. In Finland, Nokia’s success, even amid stagnation, spared thecountry from more negative developments.


39

3 The ICT Cluster

At the peak of the growth years in 2001, Nokia had some 24,000 employees inFinland – only 1.1 percent of the Finnish workforce. However, its impact on theFinnish GDP, GDP growth, value of exports, and R&D spending was far moresignificant. Nokia’s proportion of Finnish GDP was 2.8 percent, while its share ofFinnish exports amounted to almost 25 percent, national R&D 47 percent, andICT R&D a whopping 89 percent. The company’s multiplier effect was even grea-ter than its direct impact. The dual reliance on a single industry and a singledominant firm posed unique challenges and opportunities to the small, high-in-come country and was unique internationally.

In the 1990s, Nokia became the global leader in mobile handsets. Concur-rently, Sonera, along with a slate of mobcoms (mobile Internet startups), beganto pioneer mobile commerce and mobile services. The past success of the ICTcluster in Finland has often been credited to competitiveness, population disper-sion, and pro-technology attitudes. But such characteristics explain little. In Fin-land, the number of competitors has actually been lower than in many other Euro-pean countries, while demographic dispersion and technology attitudes are notthat different from those in other Nordic countries. In effect, the drivers of strate-gic advances are older and complex. The cluster performance stems from geo-politics (industry arrangements resulting from Finland’s special relationshipswith Czarist Russia and the Soviet Union), public strategies (Nordic cooperation,EU directives, Finnish deregulation and liberalization), and first mover-advanta-ges (strategies of mobile vendors and operators), particularly Nokia’s strategicdecisions.

3.1 Competitive Stages

At any particular time, it is possible to identify a predominant or emergent patternin the nature of competitive advantage in a nation’s firms. The (factor-, invest-ment-, and innovation-driven) stages of national competitive advantage provideone way to abstract the upgrading process. Each encompasses different in-dustries, industry segments, company strategies, and government policies(compare Porter 1990, pp. 543-573). What makes the Finnish case distinctive isthe extraordinary and longstanding impact of the political economy on the central


40

participants in competitive developments. From the 1860s until the 1940s and1950s, the Finnish economy was largely factor-driven. Starting in the mid-1950s,the small country opted for investment-driven growth for political rather than eco-nomic reasons. With the eclipse of the Cold War and participation in the EU,Finland has rapidly moved toward an innovation-driven economy. In each case,these macro-economic transitions have been mirrored by radical, even disrupti-ve changes in the telecom/mobile cluster (Exhibit 3-1) (Steinbock 1998, Stein-bock 2001b, 2002c, 2003f).

The Factor-Driven Stage: Local Competition, Long-Distance Monopoly

Until 1809, Finland was part of the Swedish Empire. Following the Treaty of Hami-na, Finland was incorporated into the Russian Empire, as an autonomous GrandDuchy. During the Crimean War, the military importance of the Finnish coast grewsignificantly when St. Petersburg, the capital of the Russian Empire, was threate-ned by fleets of the western nations (Steinbock 2000a, 2001b). The Finnish Tele-graph Office was Finnish by name, but controlled by the Russian headquarters.Only a year after Bell’s telephone innovation, Finland’s first telephone connecti-on was built in Helsinki. In 1881, Bell, Ericsson, and Siemens & Halske begancompetition for phones in Turku, Finland. Almost all telco startups were centeredin the major coastal cities and towns – the backbone of the contemporary FinnishICT cluster.

In 1879, The Finnish Senate decided that in order to avoid Russian interven-tion, Finnish telephone activities must be left to the private sector. Telegraph washighly centralized and “born international,” hence its critical role in the admi-nistration of the Czarist empire. The telephone, on the other hand, was far moredecentralized and “born local.” Unlike the telegraph, it served consumers andsmall businesses. The Russian authorities could allow certain autonomy in localtelephone communications, but the telegraph was a matter of national security.The arrangement was codified by the Telephone Statute of 1886 (the GraciousDeclaration). In December 1917, Finland declared independence. In 1919, afterthe Civil War, telegraph legislation gave the Finnish government the sole right tobuild and use telegraph equipment and lines. In name, Finland´s Post and Tele-graph Office (PTT) looked like other European PTTs, but local telecom was domi-nated by local telcos. With infrastructure improvements, Swedish, German, andU.S. competitors saw new opportunities in the Finnish telecom marketplace. Fin-nish authorities were aware of the weaknesses of the state-owned telephoneoperations, but wanted to avoid pressure toward nationalization, socialization,and foreign control.


41

Exhibit 3 - 1 Stages of Economic Development: Finnish Tele-communications

Politico- Grand Duchy Independent Post-WWII EuropeanEconomic (Russia) Republic Republic IntegrationDevelopment - Low-Income - Middle-Income - High-Income

Legal Statute of 1886 Amend. (1919) Telecom Acts (1986, 1997)

MicroeconomicChallenges Input costs Efficiency Unique value

Telecom Local competition Consolidation / Nordic mobile Full competitionSector Duopoly cooperation Nokia’s growth

The Investment Stage: The Duopoly Era

In the investment-driven stage, national competitive advantage is based on thewillingness and ability of a nation and its firms to invest aggressively. Competitiveadvantages widen to include low-cost but more advanced factors (e.g., universi-ty-trained engineers) and well-functioning mechanisms for factor creation (e.g.,educational institutions and research institutes). In Finland, the investment-dri-ven stage began after the war years11 in the early 1950s and continued until thelate 1980s. Just as President Juho K. Paasikivi stabilized the new political envi-ronment in foreign policy, his successor, President Urho K. Kekkonen formulatedthe economic terms of the investment economy by calling for an extraordinarilyhigh national savings rate and a rapid accumulation of capital to accelerate Fin-nish industrialization, especially in the poorer northern and eastern sections ofthe country (Steinbock, 1998 2001a-b).

In 1946, the State Council appointed a socialization committee that, amongother things, explored the possibility of socializing Finnish telecommunications.

Factor-DrivenEconomy(1860s – 1940s)

Innovation-DrivenEconomy(1990s – Present)

Investment-Driven Economy(1940s – 1980s)

11 In November 1939, the Soviet Union attacked Finland. Prior to the Winter War, Stalinand Hitler had concluded a secret pact that made Finland part of Soviet Union —eventhough, at the time, Finland and Nazi Germany were allies. The Winter War was followedby the Continuation War in the summer of 1941.

0

100

200

300

400

500

600

700

800

900

1900 1910 1938 1940 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 1997 1998 1999

SOURCE: Finnish Company Reports; Finland's Ministry of Transport and Communications.


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In 1950, the socialization committee advocated the rapid redemption of the priva-te telcos by the state. As conditions in Finland improved, socialization effortsfailed and consolidation reigned. In 1900, there were 50 telephone companies inFinland; at the eve of World War II in 1938, the number had increased to 815. Ascompetition gave way to concentration, the Finnish PTT acquired de facto mono-poly power in long distance, whereas private-sector telcos dominated local tele-communications (Figure 3-1). The PTT also began extensive repair andconstruction work, whereas reparations expanded Nokia’s cable segment andled to its diversification in electronics, which served as a catalyst to the entry intomobile communications (Steinbock 2001a, Chapters 3-4).

Concentration of Finnish Telcos (1921-75)

Figure 3-1 M&A Waves: Concentration of Finnish Telcos

By the early 1970s, tensions began to mount between the PTT and the privatetelcos. The competitive environment favored the PTT, which, unlike the privatecompanies, served as both an operator and a supervisory authority. With theincreasing convergence of computing and telecommunications, new technolo-

SOURCE: Dan Steinbock, Finland´s Wireless Valley (Helsinki: MInistry of Transport and Communication, 2000)

0

10

20

30

40

50

60

70

80

# Telcos

1921

1923

1925

1927

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

EXHIBIT 5 Concentration of Finnish Telcos (1921-75)

Post and Telegraph

Licensed Telcos

Early Concentration(1921-49)

Intensive Concentration(1950-62)

Late Concentration(1963-Early '70s)

SOURCE: Dan Steinbock, Finland’s Wireless Valley (Helsinki: Ministry of Transport and Communication, 2000)

The Number of Finnish Telecom Operators


43

gies made possible new telecom services, such as data communication. In a1970 compromise, both the PTT and the private companies were granted anopportunity to operate in data communication. This decision anticipated the ra-pid deregulatory developments at the end of the 1980s.

The Innovation-Driven Stage: From the Mobile Industry to theICT Cluster

The Finns had their first experience of a “common market” through Nordic coope-ration. From the earliest introduction of dispatch radio services, the major Nordiccountries—Sweden, Finland, Denmark and Norway— had adopted a highlyprogressive attitude towards all forms of mobile communications. In contrast tomost other European countries, the use of the mobile and available spectrumwas encouraged. The Nordic topography favored mobile, due to the dispersionof much of the population in remote places.12

Rise of NMT. The Nordic cooperation boosted cluster efforts technically,politically, economically, and socially. In 1969, the Nordic Mobile TelephoneGroup (Nordiska Mobil Telefongruppen, NMT) began to develop a new mobiletelephone system by outlining system requirements based more on marketneeds than technical parameters (Exhibit 3-2).13 The price for fixed subscrip-tions decreased and posed a minimal barrier to potential users; revenues wouldbe highly dependent on adequate traffic levels and cost-leadership strategies.14

As mobile phone equipment became lighter and less expensive, market fore-casts indicated rapid adoption rates. The first NMT 450 system entered commer-cial service in Sweden in October 1981 and Finland’s PTT followed in March. By

12 In Finland, the historical competition and pro-technology approach to mobilecommunications also contributed to the subsequent rise of the cellular business. Alongwith the rapid growth of lorry traffic, the proliferation of cars in the 1960s paved the wayfor a national mobile phone network in Finland. In November 1968, the PTT authorizedconstruction of a national mobile network.13 Led by market needs, the strategy for the introduction of mobile services was notgeared toward profitability, but efforts to integrated mobile operations with the operationsof the Nordic PTTs.14 The Nordic countries agreed on two requirements that contrasted sharply with theU.S. approach. First, roaming throughout the Nordic region was considered important,even though relatively few users (about 5%) actually took advantage of this facility.Second, the interface between the switches and the base stations was closely defined,which enabled the network operator to purchase base stations competitively at any stageof network roll-out, instead of being effectively locked in to a single supplier once theinitial purchase had been made. Compare Garrard (1999), especially Chapter 2.


44

October 1985, the network had 30,000 subscribers in Finland and 200,000 morethroughout Scandinavia. NMT was the world’s first multinational cellular networkand was successfully introduced in many other countries inside and outside ofEurope.

Exhibit 3-2 The NMT Concept: Market Needs Define SystemRequirements (1969)

· Fully automatic operation and charging· System and terminal compatibility between all four countries· Full roaming capability between all Nordic countries· Mobile to mobile calls, in addition to mobile-fixed and fixed-mobile· Sufficient capacity to last for many years· High reliability, particularly for signaling features such as call charging and

number transmission· Use similar to a conventional fixed telephone, with the same facilities· Low cost infrastructure and mobiles· Conversations protected against interception· Open specifications with no exclusive supplier rights

SOURCE: Nordic Mobile Telephone Group (1969)

Global System for Mobile Communications (GSM). With the gradual unifi-cation of the European markets at the end of the 1980s, the CEPT15 decided todevelop a common standard for digital mobile telephony: the Global System forMobile Communications (GSM). Based on the NMT concept, the GSM also mat-ched the objective of the European Commission to provide comprehensive pan-European services and standards, and to transform European telecommunica-tions from domestic monopolies into a fully competitive environment. Founded in1988, Radiolinja (the Finnet Group) sought a license in Finland to operate asecond GSM network, without a competitive tendering process. In 1990, the pro-vision of mobile communications services was opened to competition, and the PTand Radiolinja received digital GSM licenses. In the spring of 1992, Finnish mobi-le communications operators became the first in the world to offer commercialGSM service.16 Amidst competition, complaints, intrigues and price wars, GSM

15 European Conference of Postal and Telecommunications Administrations.16 Unlike NMT, GSM service permitted subscribers to the digital network to makeroaming calls throughout Europe. The first European roaming call was made betweenthe Finnish PT and Vodafone in October 1991.


45

growth was initially slow but took off in mid-1994. Two years later, GSM accountedfor 60% of all cellular users and 97% of new subscriptions. It provided the founda-tion for the growth of the Finnish telecom/mobile cluster and Nokia’s cellular suc-cess from around 1993 to 1997.17

Regulatory Restructuring. In Finland, the Ministry of Transport and Com-munications (MTC) was among the first movers in regulatory restructuring (Exhi-bit 3-3). Regulatory restructuring was codified in the Telecommunications Act of1987 and the Telecommunications Market Act of 1997. The former reflected theFinnish players’ search for first-mover advantages in telecom/mobile marketspromoting competition in local, long-distance and international telecommunica-tions. The latter represented efforts to “harmonize” these strategic moves withthe EU directives and reforms.18 Having just taken two steps forward, the Finnsnow had to take one step back to participate in the EU developments. This wor-ked against the pioneer strategies that have generated great first-mover advan-tages for the Finns.

17 Until 1993, international players had practically no opportunity to enter the Finnishmarket, due to foreign ownership restrictions. Then again, few may have been interestedin a marketplace with high cellular penetration, low tariffs, difficult topography, and tinypopulation.18 Following the new Telecommunications Act, commercial telecom operations andregulatory functions were dissociated. Licensing and financial regulation were trans-ferred from the PT to the MTC, and all other regulation was shifted to a new and inde-pendent regulatory body. Terminal equipment was liberalized and competition wasallowed, although licensing remained discretionary. The PT had special rights and didnot need a license, but it was not allowed to compete without special permission. In-creasing competition lowered tariffs, but the difference was compensated by increasedtraffic.


46

Exhibit 3-3 The Liberalization of Telecommunications in Finland (1987-99)1987

SOURCE: Ministry of Transport andCommunications (2000).

The Telecommunications Act tookeffect. Administration of telecommunications transferred from theNational Board of Post and Tele-communications to the Ministry ofTransport and Communications

1988Competition in corporate networksand data transmission partially libe-ralizedNew Radio Act created conditionsfor efficient radio administrationand use of frequencies

1990Special rights of the National Boardof Post and Telecommunicationsabolished by amended Tele-communications ActFree competition introduced in dataand GSM networks

1990-1991Licenses granted to regional radio-telecommunications networksCorporate networks subject to freecompetition

1992Switched data transfer extendedfrom licensesCompetitive licenses granted tolong-distance and local tele-communications

1993Restricted competition in long-dis-tance telecommunications andinternational telecommunications

1994Local, long-distance, and internatio-nal telecommunications subject tofree competitionFirst licenses granted to ‘serviceoperators’

1995Competitive licenses were grantedfor DCS networks

1996Amendment to the Telecommunica-tions Act:- Obliged telecommunications

operators to lease telecommuni-cations connections to each other

- Eliminated discretionary licensesfor telecommunications

- Freed customer fees fromregulation

1997Telecommunications Act replaced

by Telecommunications Market Act:- Improved opportunities for tele-

communications operators tolease each other’s telecommunications connections

- Required licenses only forconstruction of mobile communi-cations networks

- Required telecommunicationsoperators to have separate net-work and service operations

Telecommunications Market Actdesignated some telecommunicat-ions companies as having signi-ficant market power, whereasothers were able to act in a lesscontrolled environment and withmore confined duties

1998Minor forms of mobile telecom-munications (incl. AutoNet, ARPand Paging) were exempted fromlicenseMost transmission of internationaltelecommunications to Finlandexempted from notification duty

1999Service operators given the rightpurchase invoice services ornecessary Information for invoicingfrom subscription operatorCompetitive licenses granted forthird generation (IMT 2000) mobilenetworksSubscription operators obliged toseparately price use of telecom-munications networks by outgoingand terminating traffic, enabling total(i.e. end-to-end) pricing of services.


47

3.2 The Role of Nokia

Recently, rapid globalization and the Internet have accelerated Nokia’s buildingof new capabilities internally (R&D, Internet, and venture capital units) and exter-nally (some M&As, global networking). These efforts reflect an evolving transna-tional focus. Despite its narrow focus on handsets, infrastructure, and, more re-cently, software, Nokia is struggling to exploit several strategic advantages si-multaneously and worldwide. These include innovation (new technology andmarketing approaches), cost (manufacturing, logistics, new product develop-ment), and differentiation (brand, segmentation, design).

Nokia in History

In the 1860s, Fredrik Idestam built a mill less than 10 miles from Tampere. TheNokia factory attracted a large workforce, and a town of the same name grew uparound it. Exporting paper products, the firm relied on international markets.With the Finnish Rubber Works (FRW), the Finnish Cable Works (FCW) and theold forestry business, the company grew into a three-firm coalition. After WorldWar II, reparations proved beneficial to Nokia, which served as the cable supplierto the Soviet Union. In the late 1950s, Finland opened its economy to WesternEurope. At the same time, the country’s commercial ties deepened with the socia-list East, and the Soviet trade provided a testing ground for Finland’s electronicsproducts in the 1970s. In 1967, Nokia’s three constituent companies merged intoan industrial conglomerate with four major business segments: forestry, rubber,cable, and electronics. What had seemed to be the most insignificant segment,electronics, would sustain Nokia in a new era.

Growth through Technology and Internationalization

In the 1970s and 1980s, Kari H. Kairamo initiated Nokia’s radical growth strategywhile investing in electronics. To grow, Nokia had to internationalize; to internatio-nalize, it had to grow. As Kairamo put it, “That’s the greatest risk facing theFinns—the small amount of international business experience” (Steinbock 2001a). In the past, Finland’s success originated from comparative advantage andnatural resources. In the future, it would be about competitive advantage andhuman capital. It was a bold business strategy with substantial political implica-

19 Many Finnish historians stress the beneficial nature of the Soviet trade from Finland’s stand-point. This argument ignores the fact of resource dependency; something that Nokia’s electronicsdivision sought to balance with exports to the West. In contrast to the United States and its westernallies, the Soviet Union was not a sophisticated customer; it ensured trade and geographic diversi-fication, not innovation.


48

tions; it meant a shift from Eastern trade to Western exports.19 Before the M&Abinge, some 37 percent of Nokia’s exports went to the West (EFTA, EEC, otherOECD countries), and 52 percent to the Soviet-bloc countries. Between 1983and 1984, Nokia was transformed from a diversified conglomerate into an elec-tronics concern, which also meant a shift from Eastern trade to Western exports.Acquisitions required Nokia to move production closer to customers by creatingmore overseas manufacturing facilities. In the early 1970s, exports and foreignactivities accounted for 20 percent of total sales. By 1980, exports and foreignactivities increased to more than 50 percent. Between 1980 and 1988, Nokia’spersonnel more than doubled to 44,600, while revenues quadrupled to FIM 21.8billion. Electronics (59 percent) became the primary business segment, whilecable (18 percent), forestry (14 percent), and rubber (8 percent) served as sup-port segments.

Digital Electronics: Investment and Innovation

In the 1960s, Nokia’s electronics department began research in radio transmissi-on. Nokia’s “digital gurus” (e.g., Björn Westerlund, Kurt Wikstedt) maintainedgood relations with universities, had a strategic vision of a digital future, and wereeager to use new technology commercially. But pioneership did not translate toprofitability. From the late 1950s until the mid-1970s, Nokia’s electronics was acash trap. Relying on American management approaches years before thesewere widely used in Finland, Nokia boldly allocated capital into electronics andtelecommunications. In the early 1970s, Nokia’s electronics unit began develo-ping the digital switch that eventually became the famed Nokia DX 200.

Consolidation of Finnish Electronics

In Finland, the electronics industry originated in the 1920s, with the rise of radiomanufacturing and the Finnish Broadcasting Corporation. Radio communicationalso played a vital role during the war years. Between 1945 and 1980, Nokiaconsolidated state-controlled and privately-owned units of Finnish businesses,which been instrumental in electronics, radio phones, and TV, including Nokia’selectronics division (early 1960s), Mobira (1979), and Televa (1981). This con-solidation would not have succeeded without two critical failures by the publicsector (Steinbock 2001a). The first occurred in the early 1950s, when the com-munists hoped to socialize Finnish telecommunications. As conditions improved,these objectives were buried. The second effort took place in the 1970s, when abroader-based leftist coalition sought to nationalize the nascent Finnish electro-nics by creating a Finnish “national champion” in telecommunications and bio-technology. Initially supported by the socialists, communists, and centrists, this


49

plan led to the so-called Valco corruption scandal. Only after these two failurescould Nokia consolidate the business, through the acquisition of Televa. In 1977,Nokia, along with other equipment manufacturers, also joined the Nordic mobilecooperation. Two years later, Mobira manufactured the first NMT base stations toFinland’s PTT.

Nokia and Mobile Communications

As England and Sweden launched their first networks in 1981, Mobira enteredthese markets. Although Helsinki remained the home base, Salo was chosen asthe corporate headquarters and manufacturing center of radio phones. By themid-1970s, Nokia had used a U.S. license to manufacture manpack phones inOulu. This move led to the transfer of the radio phone factory from Helsinki tonorthern Finland, where it would produce base stations and other PMR equip-ment.20 Through the 1980s, Nokia-Mobira designed, manufactured, and mar-keted mobile end-user equipment while Nokia Cellular Systems focused on thesystem infrastructure. By the early 1990s, these two subsidiaries evolved intoNokia Mobile Phones and Nokia Networks.

Internationalization of Mobile Activities

New markets emerged worldwide and grew rapidly. Novel technologies and inc-reasing complexity required greater R&D expenditures. Between 1979 and1987, revenues soared from 49 FIM million to 1,084 FIM million, while exportsmore than doubled to almost 75 percent. In 1984, Nokia and Tandy set up a plantin South Korea to distribute phones in the United States through Tandy’s RadioShack outlets and under the Radio Shack brand name. The mobile networks andphones still amounted to just 7.5 percent and 6.4 percent of total net sales, res-pectively. Toward the late 1980s, Nokia-Mobira joined forces with France’s Alca-tel and West Germany’s AEG to devise a system for Europe. To ensure that Nokiacould influence standards, Kairamo sought greater market share, particularly inthe United States. Before the anticipated GSM explosion, he insisted on a singlebrand name—Nokia—for all products. As the company prepared for high volu-mes, Nokia’s electronics manufacturing activities in Salo were brought under asingle umbrella, while a new mobile phone factory was launched in Bochum, WestGermany, to meet growing demand in Continental Europe.

20 By the mid-1970s, Nokia used an American license to manufacture manpack phonesin Oulu, which led to the transfer of the radio phone factory from Helsinki to Oulu, as well.Over time, these strategic decisions led to the rise of Nokia’s sub-cluster of cellularactivities in northern Finland.


50

Global Focus Strategy

As Nokia’s mobile units struggled to manage hypergrowth, the parent was sweptby a struggle for corporate control. Amidst the turmoil in late 1988, Kairamo com-mitted suicide. So began Nokia’s restructuring and financial rollercoaster. Despi-te the depth of the recession, Nokia recovered as its new CEO, Vuorilehto, stre-amlined businesses and Jorma Ollila was appointed CEO in 1992. With FIM 15.5billion in net sales, Nokia’s telecom and mobile groups accounted for just 28percent of the total. Under Ollila’s leadership, Nokia focused on mobile communi-cations and divested non-core operations. In July 1991, Finnish telecom authori-ties inaugurated a digital mobile network supplied by Nokia Telecommunications,while NMP presented a digital GSM car phone for mass production. As Nokiabecame the first company to offer digital mobile phones in the Triad markets,Ollila bet Nokia’s future on the GSM vision: “Focus, Global, Telecom-Oriented,High Value-Added”(Steinbock 2001a). While Ollila and Olli-Pekka Kallasvuo, theCFO of the company, crafted the basic elements of Nokia’s winning strategy, thegroup executive board refined and executed it. Nokia opted for a global focusstrategy. It concentrated on core capabilities (Nokia Mobile Phones, Nokia Net-works), while leveraging both units worldwide and divesting all non-core proper-ties.

3.3 Public Policies and Private Strategies

Nokia played a critical role in the emergence of the Finnish Wireless Valley in the1990s. It was supported by public-sector policies, but primarily in the 1970s and1980s – in the early phases of mobile evolution.

Localization: From Investment Policies to RegionalInnovation

In 2003, Finland was Europe’s most competitive economy (WEF 2003). It rankedthird globally in R&D spending per capita, and second in the international Inno-vation Index. It had a high Internet and mobile penetration. It was the global leaderin electronic banking, and possessed a national 100% digital fiber-optic network.It also continued to hold a strategic geographic position in the emerging “NewNorthern Europe.” With shared cultural roots and long-established connectionsEast and West, geographic positioning, and advanced infrastructure, the Finnssaw their country as an ideal operations base for business in the New NorthernEurope.


51

Finland shared a border with Russia, and much EU trade with Russia travelsvia Finland. Also, the Finns had experience in organizing business in Russia andother former Soviet states. In fact, Finland was Estonia’s largest trading partner.Moreover, three Baltic states (Estonia, Latvia, and Lithuania) had made substan-tial progress in structural reforms and market economy development, and werecurrently in EU membership talks.

Finland provided a favorable business climate for investors, with solid growthforecasts in GDP and industrial production, low inflation outlook, and competitivecorporate tax (29%) and operating costs (Exhibit 3-4). Since the late 1990s,these measures have been backed up with other indicators of international com-petitiveness, including the availability of high quality labor, scientific and techno-logical expertise, and an ability to respond to modern business needs. Finally,the country had launched a wide range of programs to support cooperationamong companies, universities, science parks, and other public organizations.During the Cold War era, the investment economy had been intertwined with anational, highly centralized, and top-down industrial policy. Since the 1980s andintensifying with European integration, these characteristics have been repla-ced by local, decentralized, and bottom-up regional policies.

From National Policy to Regional Innovation

In Finland, the Ministry of Interior outlines national objectives for regional deve-lopment and coordinates the implementation, monitoring, and evaluation of de-velopment programs.

Exhibit 3-4 Reasons to Invest in Finnish ICT

- Solid and sound ICT industry with

strong key areas of expertise

- Outstanding test market as a result ofhigh user acceptance of new productsand concepts, market size, and IT pe-netration

- One of world’s foremost ICT infra-structures

- Recognized world leader in mobilecommunications, specialized softwaredevelopment and digital environment

- Qualified and competitive workforcewith good language skills

- Active and productive developer

communities

- Renowned management skills, wellsuited for global high-tech economy

- Active and productive cooperation between research and industry

- Competitive operating costs

- Finland ranked most competitivebusiness environment in several

international comparisons

SOURCE: Invest in Finland.


52

National regional development is guided by the Regional Development Act(2002) and the Regional Development Decree (2002). The objective of the Actsis to promote national regional policy and to recognize regional diversities anddifferent development potentials (Kavonius 2001). Emulating the requirementsof economic development, regional policy legislation has evolved in several sta-ges.

After the investment-driven growth policies of the 1950s, the Finnish regionalpolicy legislation focused on industrialization of the least developed areas(1966-1975), especially with Kera, a state-owned funding corporation. The ideawas to accelerate economic growth and thereby industrialize the least developedareas. From the mid-1970s to the late 1980s, Finnish regional legislation sup-ported regional policy planning. The goal was no longer just an industrializedcommunity, but a welfare society. From 1989 to 2001, Finnish regional legislationpromoted the knowledge-based society, which went hand in hand with the inno-vation stage of economic development. The planning system was no longer con-ceived of as an amalgam of a central (top-down) and regional (bottom-up) levels,but comprised regional, thematic, and problem-oriented programs. Along withthe old central and regional actors (state and municipal authorities, businesssector organizations) and the new supra-national players (EU), local actors (bu-sinesses, universities, polytechnics, research units) were rapidly increasing innumber. Within this framework, national and regional innovation policy continuesto have a role; however, it is likely to concentrate on functions such as regionaldevelopment strategy for R&D funding, R&D inputs to service sector, the Centerof Expertise Program, and regional development strategy for universities andpolytechnics. These developments parallel efforts to revise government actionsand functions, as well as regional development strategies for Ministries and sec-tors.

Internationalization of Finnish ICT Firms

Internationalization is a process of increasing involvement in international ope-rations, which requires adapting the firm’s strategy, resources, structure andorganization to international environments (Welch & Luostarinen, 1988). Globa-lization is part of internationalization and stems from the interdependenciesacross subsidiaries (Nicholas & Maitland, 1998) or the value chain of an interna-tional firm, which needs to be actively managed (Porter 1986). Since the mid-70s,European (Johanson & Vahlne, 1977; Luostarinen, 1977; Johanson & Vahlne,1990) and U.S. research streams (Bilkey, 1978; Cavusgil, 1980) have conceptu-alized export development as taking place in gradual and sequential stages(learning sequences involving feedback loops). These stages are based on aseries of incremental commitment decisions depending on factors including per-


53

ception, expectation, experience, managerial capacity. The firm is assumed tobuild a stable domestic position before starting international activities.

In this approach, internationalization is an evolutionary, phased processthrough which firms grow increasingly committed to and engaged in internationalbusiness operations, through specific products and services in selected mar-kets.21 In Finland, the internationalization of the technology-driven Nokia in the1970s and 1980s, as well as the globalization of the more recent ICT firms, can beunderstood against the context of economic development, firm internationalizati-on, and leapfrogging.

Factor-Driven Stage: Manufacturing and Traditional Exports. Throughthe post-World War II era, the Finnish economy was characterized by resource-driven growth. From the late 19th century until the 1960s, Finnish forest and metalindustries accounted for traditional export operations. The merger of the three-firm Nokia in 1967 reflects these developments.

Investment-Driven Stage: From New Exports to Foreign Operations.By the 1960s, certain Finnish firms were able and willing to internationalize ear-lier, faster, and on a larger scale. Internationalization still relied on traditionalexport operations, even if the industries were “new” (textiles, clothing, leathershoes, electrical, plastic). After the mid-1970s, internationalizing manufacturingand construction businesses were augmented by Finnish service firms, whichbegan international operations to follow their domestic customers abroad. At thesame time, Finnish firms that had internationalized through traditional exportsbegan foreign operations. It was in the 1980s and early 1990s that the last do-mestic bastion of the Finnish economy, retail and wholesale firms, began interna-tional operations. Concurrently, Nokia was able to consolidate Finnish electro-nics. It undertook international M&As, while moving from cable, rubber, and fo-restry to technology. Its foreign operations heralded internationalization via fo-reign operations. To exploit greater efficiencies, Nokia coupled indirect and di-rect exporting with new modes of operations, such as licensing, subcontracting,contract manufacturing, partial projecting, turn-key projects, and different typesof subsidiary operations.

Innovation-Driven Stage: From Internationalization to Globalization.In the 1980s, the boldest Finnish firms had reached the international stage. Be-cause of increasing reliance on different types of foreign operations, companiesgrew, and the role of international business in total revenues exceeded 50%(compare Figure 3-3). The changing environment translated to changing orga-nizational capabilities. To cope with the challenges of international markets, Fin-

21 Before the 1990s, most of these internationalization studies in Finland originate fromthe data of Finland’s International Business Operations (FIBO) Research Program at theHelsinki School of Economics. This longitudinal data enables a dynamic perspective toexplore the internationalization of the Finnish firms in the post-World War II era.


54

nish firms had to reconfigure their assets and capabilities, overseas operations,and knowledge development and diffusion. This internationalization, precisely,was Nokia’s challenge in the 1980s. By the 1990s, two different groups of Finnishfirms developed a global mindset. On one hand, large Finnish MNCs tried tochange with the markets. On the other hand, SMEs and startups were born amid-st new technologies that were considered ‘universal’ by nature. Both groupssought to exploit scope to achieve scale. Both developed a global mindset tocover for large R&D investments and to compensate for small markets or small-scale manufacturing. Among the first group of companies was Nokia, which refor-mulated its old strategy and engaged in a global focus strategy. The secondgroup was exemplified by a slate of technology startups, or “born globals”, whichinitiated their business operations at a global level.

Born Globals

In the 1990s, new empirical studies of export behavior challenged findings in thetraditional internationalization literature. Many of them initiated international ac-tivities right away, entering distant markets and multiple countries simultaneous-ly, forming joint ventures without prior experience and so on. Such firms havebeen called international new ventures (Oviatt & McDougall, 1994), high techno-logy start-ups (Jolly et al., 1992), born globals (McKinsey & Co., 1993; Knight &Cavusgil, 1996; Madsen & Servais, 1997), and metanationals (Doz, 2002). Withglobal markets, new technologies and increasing international experience, manyof these firms were willing to compromise risk and experience for rapid, globalgrowth. The concept ‘born global’ was coined in a survey for The Australian Ma-nufacturing Council (McKinsey & Co., 1993; Rennie, 1993). The implications ofthis new type of exporting firm were described by Tamer Cavusgil (1994, p. 18) inthe first scholarly article about born globals in 1994:

There is emerging in Australia a new breed of exporting companies, whichcontribute substantially to the nation’s export capital. The emergence ofthese exporters though not unique to the Australian economy, reflectstwo fundamental phenomena of the 1990s: 1.Small is beautiful. 2.Gradualinternationalization is dead.

According to Luostarinen and Gabrielsson (2001, 2002), Finnish born globalsstart international operations before or simultaneously with domestic operations.They base their visions and missions mainly on global markets and customersfrom inception. They plan their products, structures, systems, and finances on aglobal basis. They grow exceptionally fast in global markets and seek global mar-ket leadership. Their products, operations, and marketing strategies differ from


55

traditional ones. Approximately 2/3 of all Finnish born globals can be traced tothe ICT industries.

Genesis in mid-1980s, Increases in Late 1990s. The first Finnish bornglobals were established after the mid-1980s, and their numbers have increasedsince the late 1990s. They operate in several business segments, includinghigh-tech, high-systems, high-service, high-know-how, and high-design. Howe-ver, their role is particularly strong in the ICT sector, where the globalization dri-vers are especially high, markets needs are converging, segmentation is global,trade barriers are low, standards are increasingly common, and characterized byglobal competition and rapid technology lifecycles.

Rapid Global Market Expansion. In the globalization strategies of Finnishborn globals, broad product portfolios are not possible, internationalization bystages is not the normative guideline, and market expansion is rapid. Europemay still be the first target market, but American and Asian countries are enteredwithin 1 to 4 years. In the marketing strategies of the Finnish born globals, broadcustomer range is not possible, cost-based pricing is not applicable, and traditio-nal channels are not recommendable. Instead global brand is considered a must.

Great Challenges, Great Opportunities. Finnish born globals face extra-ordinary challenges. With small markets and limited financial and managerialresources, these companies must globalize quickly. On the other hand, they aredriven by extraordinary opportunities. With experience, managerial resourcesare growing. Flexible tri-functional teams (designers, engineers, and marketers)can overcome past challenges. Cooperation is tightening between governmentorganizations, universities, and companies. Horizontal cooperation is also inc-reasing, through joint technology and standard development, global terminaland network manufacturers, and operators and content providers. Finally, ad-vanced technologies are increasingly used for sales and marketing.

Internationalization Services

In addition to educational and science policy and technology policy, the Finnishpublic sector provides internationalization services. In outward internationalizati-on, the key players are Finnvera (Export Credit Agency) and Finpro (Associationfor Internationalization Services), which are said to focus on Finnish SMEs. Ininward internationalization, the key player is Invest in Finland.

Finnvera (Export Credit Agency). Finnvera is a specialized financing com-pany. It offers financing services to promote domestic operations of Finnish busi-nesses and to further exports and internationalization of enterprises. Owned bythe Finnish state, Finnvera has share capital of EUR 188 million and a balancesheet total of EUR 1,530 million. Its outstanding commitments comprise creditsand guarantees of about EUR 2 billion, as well as export credit guarantees and


56

special guarantees of about EUR 4 billion. In 2002, Finnvera had 16 regionaloffices and 27,500 clients.

Finpro (Association for Internationalization Services). Finpro is an ex-pert and service organization whose mission is to speed up the internationaliza-tion of Finnish businesses. It is owned by Finnish companies. The clients areFinnish companies at different stages of internationalization. The organization’sobjective is to provide Finnish companies, especially SMEs, access to compre-hensive internationalization services in different parts of the world, through itsTrade Center Network. Its competence focuses on the industry sectors and mar-ket areas where Finnish companies have a special competitive advantage or thatare interesting as potential markets. Its expertise and competence areas reflectthe most important industry sectors of the Finnish economy. Finpro considers theaccepted concept of “innovation” narrow, as it focuses on science and technolo-gy. It advocates a more inclusive concept, which also underscores functional,organizational, and even social innovations. In 2002, Finpro carried out morethan 2,200 consulting assignments - target market analyses, start-up assign-ments, partner searches, drawing up and execution of internationalization plans- in the 51 Finland Trade Centers and in Helsinki. Finpro’s invoiced servicesreached more than 4,800 companies and organizations around Finland. Morethan two thirds of Finpro’s clients were small and medium-sized enterprises. Its e-services had more than 10,100 registered users. The Group’s self-financing ratewas 35.5%, whereas the government subsidy for the year was EUR 20.1 million.

Invest in Finland. Invest in Finland is a national organization promoting fo-reign direct investment in Finland. Funded by the Ministry of Trade and Industry,it promotes Finland as an attractive location for foreign companies. The organi-zation operates in close connection with Finnish industry and serves as an inter-mediary between foreign and domestic companies. Key activities include invest-ment programs (focus on ICT, health care, and environmental technologyandservices), location services, and communications. With only eight employees,Invest in Finland is much smaller than the other players in the Finnish innovationsystem.

Nokia’s Innovation

In the 1980s, Nokia chief Kari H. Kairamo argued that if strategic and technologi-cal change were paramount in global high-tech competition, then Nokia and Fin-nish companies would have to embrace such change. This requires firm-levelcapabilities: managerial, organizational, marketing, manufacturing, and particu-larly R&D. The key to success, reiterated Kairamo, was lifelong learning andinternationalization (Steinbock 2001, Chapter 2). These views continue to per-meate Nokia’s innovation.


57

From Public R&D to Nokia’s R&D

Today, Nokia is often perceived as the most innovative wireless R&D company.Yet, its relative R&D expenditures were lower than those of its direct rivals, Moto-rola and Ericsson, until the late 1990s (Steinbock 2002a, 2002b). In Finland,Nokia’s role in national R&D has grown rapidly; in worldwide terms, Nokia’s R&Dbegan to climb in the late 1990s, in preparation for the 3G transition. In 2001,Nokia’s proportion of Finnish R&D was almost one third and accounted for some47 percent of private sector R&D. Inclusive of Nokia’s foreign R&D, total R&Dexpenditures reached about EUR 3 billion at the peak of the growth years. Thatsame year, the entire Finnish private sector R&D was barely EUR 3.5 billion.

In 2002, Nokia’s R&D amounted to EUR 3,052 million and accounted for 10.2percent of its sales. In Finland, Nokia’s two closest ICT R&D rivals – LM Ericssonand Sonera – spent EUR 94 million and EUR 53 million, respectively, in R&D,which amounts to only 1.5-3 percent of Nokia’s R&D volume. Nokia’s closest 30Finnish ICT leaders invested a total of EUR 365 million, or barely 11 percent ofNokia’s annual R&D. In 2002, Nokia’s proportion of the national R&D in Finlandrose to 63 percent, and its proportion of the private sector R&D reached 89 per-cent (Figure 3-2, Table 3-1).

In Finland, Tekes (the National Technology Agency) is the primary public actorin the national R&D. In the 1970s, the MTI Technology Office, Tekes’s predeces-sor, supported Nokia by an average of seven percent of the firm’s total R&Dexpenditures.22 After its creation in 1983, Tekes became Nokia’s primary publicfinancier. At the turn of the 1980s, Tekes funded an average of 25 percent and,thereafter, 15 percent of Nokia’s R&D expenditures. Following these peak years(in terms of relative funding), Tekes’s role of Nokia’s R&D spending declinedsubstantially, except during the recession in the early 1990s.

In the early 1980s, Tekes’s support allowed Nokia to accelerate its mobile R&Dand thereby boosted Nokia’s increasing investments into analog mobile commu-nications (NMT). In the early 1990s, Tekes’s funding contributed to Nokia’s abilityto sustain its research activities, through the through of the economic slump.Through the late 1990s, the proportion of Tekes’s funding has amounted to anaverage of 1.5 percent. Concurrently, more than half of the Tekes funding went toprojects by the Nokia Research Center (Figure 3-3).

22 The Nokia figures stem from the author’s review of Nokia’s annual and companyreports, from 1965 to the present. The Tekes figures originate from publicly availableTekes information. Both sources have been augmented with Ali-Yrkko and Hermans(2002) and Haikio (2001). The first is a research study by ETLA, which often cooperatesand is co-funded by Tekes; the second is Nokia’s official corporate biography.


58

Table 3-1 Finnish ICT R&D Leaders (2002)

R&D Rank Top-100 Firm EUR Mil R&D/Sales Industry

1 1 Nokia 3052 10.2 Telecom Eqpt 2 4 LM Ericsson 94 61 Telecom Eqpt 3 10 Sonera 53 2.4 Telecom Access/Svs 4 15 Elisa 36 2.3 Telecom Access/Svs 5 18 Tellabs 30 10.9 Telecom Eqpt 6 27 Sanoma-WSOY 18 0.8 Media 7 31 Elektrobit 14 10.5 Components 8 37 Tekla 12 29.1 Software 9 38 Tecnomen 11 28 Software and Svs 10 39 F-Secure 9.8 25.5 Software 11 42 Filtronic 9.2 8.5 Components 12 44 Proha 8.6 8.5 Software 13 48 SSH Communications 8.2 48.8 Software 14 50 Stonesoft 7.4 24.7 Software 15 53 Teleste 6.6 9.9 Telecom Eqpt 16 57 NetHawk 5.9 26.6 Software 17 61 Benefon 5.3 36.1 Telecom Eqpt 18 64 Salcomp 5 3.9 Components 19 70 VTI Technologies 2.1 9.8 Electronics 20 73 Alma Media 4 0.7 Media 21 74 Okmetic 3.8 7 Electronics 22 77 Honeywell 3.7 3.1 Automation 23 83 Basware 3.3 1.9 Software 24 84 Aspocomp 3.2 1.7 Components 25 94 Evox-Rifa 2.7 3.9 Electronics 26 95 Setec 2.5 4.9 Security 27 96 QPR 2.4 27.9 Software 28 100 Detection Technology 2 36 Electronics

Nokia’s Science Policy

Through its research laboratories, the NRC keeps an eye to the development ofa wide variety of sciences. These laboratories – Audio-Visual Systems, Electro-nics, Communication Systems, Mobile Networks, Radio Communications, Soft-ware Technology – serve as the backbone of the flexible R&D framework. To usethe technological skills of all its laboratories to the fullest extent, strategic pro-jects have been arranged under three focus areas: Mobile Applications, FutureMultimedia Terminals, and Wireless Access. Still, as important as the sciencebase remains for Nokia, it is the company’s R&D, particularly Nokia ResearchCenter, which forms the core of its innovation activities.

0

500

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Nokia

Sonera

Tellabs

Elektrobit

Tecnom

en

Filtronic

SSH C

omm

unications

Teleste

Benefon

Nokia

EUR 3,052 Million

Others (27)

EUR 364 Million


59

Figure 3-2 Finnish ICT R&D Leaders: Nokia’s Role (2002)

SOURCE: Tekniikka ja Talous

(1969 - 2000)

EurMillion

At Nokia, effective R&D is vital to remain competitive in the mobile communica-tions industry. Operating in seven countries, Nokia’s corporate research unitemploys nearly 1,200 staff, with one in seven employees holding a PhD. TheNokia Research Center (NRC) generates half of the essential patents of thecompany. At the end of 2002, the company employed 19,579 people in R&Dcenters in 14 countries, representing approximately 38% of the total workforce(Figure 3-4). That year, Nokia increased its R&D investments to EUR 3.1 billion,representing 10.2% of net sales. At the peak of its growth years in 2000, Nokiahad more than 24,000 employees in Finland. Fourteen R&D centers and fivemanufacturing sites were concentrated in five locations: Greater Helsinki, Turkuand Salo, Tampere, Oulu, and Central Finland.

The company invests a substantial portion of its resources in R&D activitieswithin its key business groups and in the Nokia Research Center. The NRC dri-ves Nokia’s technological competitiveness and renewal in technology areas vitalfor future success. Interacting closely with all Nokia business groups, the rese-arch center supports Nokia’s evolving core businesses by: (a) developing newconcepts, technologies and applications; (b) developing disruptive technolo-gies beyond the current product horizon; (c) acting as an incubator for technolo-gy-oriented ventures; (d) performing not only “R” but especially “D.”

0

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(FIM

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%

Tekes Funding

(FIM Mil.)

Per cent of

Nokia's R&D

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(%)

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%

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Total Sales

(%)

R&D

Expenditures

(FIM Mil.)


60

Figure 3-3 R&D Expenditures: Nokia and the Role of Tekes 1969-2000

Nokia’s R&D and Tekes Funding, 1969 - 2000

SOURCE: Nokia Nokia’s R&D: Expedintures and Percent of Total Sales, 1969 - 2000

Nokia Research Center serves as a link between basic industry research andproduct development. While responding to the product development needs ofNokia’s business groups, the NRC is also responsible for carrying out Nokia’s

SOURCE: Nokia


61

Figure 3-4 Nokia’s R&D Production Locations

a) Worldwide (2003)

- South Korea- Spain- Sweden- USA

Nokia MobilePhones

- Brazil- China- Finland- Germany- Great Britain- Hungary- Mexico

.

Oulu5,134

b) In Finland (2000)

Central Finland426

Tampere3,457

Nokia VenturesOrganization

- China

NokiaNetworks

- China- Finland

Nokia’s R&DLocations

- Australia- Canada- China- Denmark- Finland- Germany- Great Britain- Hungary- India- Japan

14 R&D Centers Espoo, Helsinki,Oulu, Salo,Tampere, Turku,Jyväskylä

5 manufacturing Espoo, Hauki- sites pudas, Oulu,

Salo, Vantaa

Turkuand Salo

5,389Helsinki9,973

longer-term research (Figure 3-5). About 70 percent of the NRC’s annualbudget comes from selling contracted research directly to Nokia’s business


62

groups. Inside and outside Nokia, the NRC is known for its organizational culture,which nurtures innovative spirit and encourages individual initiative. The NRCmanages and coordinates research cooperation and standardization for thecompany.

For Nokia, industrial cooperation in pre-competitive research, coupled withactive standardization, is a prerequisite for a thriving mobile communicationsbusiness. Only fully compatible products and services can enlarge existing mar-kets and open up new ones. Unlike many of its rivals, Nokia is keen to keep its“soft signal antenna” up through venturing and standardization as well as conti-nual external networking with business communities, customers, product users,and a range of other stakeholders.

Nokia´s Globally Networked R&D

In the past, research on the Finnish ICT cluster has emphasized indigenous R&Ddrivers. With the increasing impact of globalization since the late 1990s, thisemphasis results in misleading conclusions. While Nokia’s domestic R&D activi-ties continue to play a great role in its broader R&D strategy, the objectives of thisstrategy are now driven by global competition (on the globalization of wirelessR&D, see Steinbock 2002b). In the past, Nokia’s R&D operation was centralized,insular, and largely domestic, except for some efforts in the Nordic countries.After the mid-1990s, the capabilities became distributed, market-driven, andnetworked globally. The critical milestone between centralized R&D, dominatedby national telecom monopolies, and distributed R&D, pioneered by mobile ven-dors and IT leaders, lies in the global telecom reforms. Between the early 1980sand 1998, these reforms effectively demolished what was left of the centralizedR&D regimes and forced the leaders to adapt to distributed R&D.

Nokia’s worldwide R&D network emulates the basic manufacturing configura-tion and was in place after the mid-1990s. By 2002, it consisted of three majorcircles of networked activities. The primary R&D concentrations were in Nordiccountries, Western Europe, and Asia Pacific. The United States was the key sitefor the Internet capabilities. The Center had more than 50 R&D sites in 15 count-ries, representing all central Triad locations: Nordic countries (Finland, Sweden,Denmark) and Europe (Great Britain, Germany, Italy, Spain, Hungary), NorthAmerica (the United States, Canada), and Asia Pacific (Japan, China, Australia,Malaysia, South Korea).

Unlike the classic Bell Labs, Motorola, and Ericsson, Nokia’s wireless R&Ddoes not rely on purely domestic centralized resources. Nor does it enjoy geo-graphic large-scale home base advantages. And while it reflects Ericsson’s sco-pe-driven innovation, it is moving away from centralized resources (see Stein-bock 2002b).


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Figure 3-5 Nokia’s R&D and NRC

a) R&D at Nokia

Nokia Core Business

R&D R&D R&D

Nokia Research Center

R

R & D

b) Nokia Research Center Locations

Universities,Research Institutes

International R&D Co-Operation


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NMP R&D Locations

With the rise of supplier-chain management and the Internet, speed and agilityhave become strategic in global technology rivalry. Because of increasing priceerosion, time-to-market and order cycle time are critical to success. Conse-quently, geographic clusters have actually grown in importance through the“death of distance.” In the early wireless era, the United States served as thesingle core cluster and lead market. Today, multiple core clusters and lead mar-kets exist, the strategic ones located in Western Europe, the United States, andAsia-Pacific (Japan, China, Korea). Close proximity of cluster participants redu-ces transport costs and optimizes time-to-market.

With their specific sets of expertise, Nokia’s research centers are instrumentalin the mobile phones product value chain. Geographic dispersion is secondaryto cooperation vis-à-vis virtual teams. The company has a two-fold locationalpattern: knowledge-based activities are conducted in higher-cost core clusters,whereas lower-cost manufacturing activities take place in lower-cost regions(Table 3-2).

At the peak of its growth years in 2000, Nokia’s cluster partners in the massproduction of mobile phones were clustered in three strategic regions:

Along the coastline of the Gulf of Finland, knowledge-based pre-massmanufacturing was accomplished in Salo and Helsinki, while (lower-cost)mass manufacturing was performed 100 km away in Tallinn (Estonia).

In Texas, the United States, pre-mass manufacturing activities wereconducted in Forth Worth (Texas, USA), while mass production wasaccomplished in Monterey (Mexico).

Southeast Asia’s central production sites were located in China specialeconomic zones (SEZs) (compare Steinbock 2002, Chapters 7, 10).In the past few years, new activities reflect similar patterns (e.g., invest-ments in Germany/Hungary), as well as increasing emphasis on high-valueregions (e.g., relocation of corporate finance and parts of multimedia andenterprise solutions in New York).


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Table 3-2 Nokia’s Core R&D Locations and Capabilities (ca. 2000)

Core R&D Capabilities*Listings City, Country Rc E Se Mm Rf Cn Cs Vrs 3Gs Vt Dsp Location Rationale

8 Helsinki, Finland x x x x x x x x Home base; near HelsinkiUniv.of technology

4 Boston, U.S. x x x x Near MIT (Media Lab)4 Tampere, Finland x x x x Near Univ. of Tampere

and public Research labs;Communicatorproject

3 Dallas, U.S. x x x Near Univ. of Texasand Texas Instruments(a key Nokia supplier)

3 Oulu, Finland x x x In Oulu Technopolis,near Univ. of Oulu;network equipment

3 Tokyo, Japan x x x In Yokosuta ResearchPark near NTT DoCoMo

2 Kista, Sweden x x In Kista Technopolis,recruition of formerEricsson and SwedishICT empl.

1 Beijing, China x In the He Ping Li’s indus-trial Park; close to market,emerging suppliers

1 San Diego, U.S. x Located in San DiegoScience Park, nearUniv. of CA (SD);Qualcomm, CDMA

1 Bochum, Germany x Near Univ. of Bochumand Siemens

1 Budapest, Hungary x Low-cost high-skilllabor in softwareengineering; Hungariansimilar to Finnish

*CoreCapabilit iesRadio communication (Rc)Electronics (E)Software engineering (Se)Multimedia (Mm)

Radio frequencies (Rf)

NMP R&D and Suppliers

The competitive function of Nokia’s Finnish suppliers is largely the function ofNokia Mobile Phones’ two-sided R&D strategy (compare Nokia, 2003). First, NMPdevelops standard platforms incorporating characteristics and components thatare often common across all mobile phone product lines. These platforms in-clude industry standard components (microprocessors and semiconductors),which are purchased from Finnish contractors as well as developed in-house.

Cellular networks (Cn)Communications system (Cs)Voice recognition system (Vrs)3G standardization (3Gs)Videotechnology (Vt)Digital signal processing (Dsp)


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Second, NMP develops high value-added software and radio technology accor-ding to specific system standards.

As a result of its strategy, Nokia has been able to outsource most of its compo-nents for its mobile phones. While Nokia develops most of its software in-house,some software elements, such as the Symbian operating system, are developedby outside partners –a rising number of small Finnish software players. Theseefforts, however, are subject to the globalization of the industry value chain, in-cluding the rivalry between European-based mobile players, and U.S.-based ITleaders. These two strategic groups, led by Nokia and Microsoft, respectively,favor quite different approaches, standards, and applications. The competitionis global by nature. In relative terms, Finnish mobile software expertise is extraor-dinary; but in absolute terms, it can never match the competition. Around 2001and 2002, for instance, Nokia’s community of developers amounted to some500,000 worldwide, whereas Symbian had attracted some 34,000 developers.These were challenged by Microsoft’s community of some 2.3 million WindowsCE developers (Steinbock 2002, particularly Chapters 13-14).

Only the generic base of this learning originates from Finnish innovation sys-tem; much of it has been built within Nokia. This distinction is vital. The core capa-bilities are not location-dependent. If Nokia were to relocate them, only the gene-ric base of knowledge would remain in Finland. Change is so rapid and dynamicin the ICT sector in general and in the wireless segments in particular, that criticaltechnology skill-sets may grow obsolete in just a few years. To develop, sustain,and renew strategic technology capabilities, Nokia cultivates innovation – but itcannot dictate the terms of globalization in mobile communications. It can only tryto shape this globalization.

3.4 Struggle for Industry Leadership

Led by the Nordic core clusters, the Europeans opted for GSM, which was pio-neered by Nokia and Ericsson. At the end of the 1990s, these Euro-Nordicplayers seemed to enjoy absolute and relative superiority in the business, whichwas said to be pushed by the “twin drivers” of mobility and the Internet. By 2002 –with the consolidation in the U.S. technology sector and the 3G birth pains inEurope – this superiority eroded rapidly, and the twin drivers looked more like adouble whammy (Steinbock 2003).

In one direction, the U.S.-based IT leaders were eager to capture sizablechunks of worldwide markets. In another direction, NTT DoCoMo, which had soldmultimedia cellular by pushing services rather than technologies, was eager to“transitionalize” the 3G era. As market-driven innovation swept through the sec-


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tor, technology development was no longer internal but external (tech coalitions,venture capital and corporate innovation, global R&D networks). In the shortterm, that system worked for the Euro-Nordic leaders, which were more familiarwith cooperation than American-style competition. In the longer term, these wire-less leaders would find that externalizing strengths reduced their impact and re-sulted in the diffusion of competencies and capabilities.

Competitive Threats and Opportunities: U.S. IT VersusEuropean Mobile

In the past, the transition of platforms in wireless communications was largely anintra-industry affair. With the convergence of mobility and the Internet, the oppo-sition between European-based wireless leaders and U.S.-based IT leaders hasbeen magnified by differences in evolution. In wireless communications, the in-dustry has advanced from the pre-cellular era to analog and digital cellular and isamidst the transition to multimedia cellular. In the IT world, the industry has evol-ved from mainframes, minicomputers, and personal computers to Internet-enab-led systems, which were amidst mobilization. Wireless leaders are transitioningfrom voice to data; IT leaders from data to voice.

In computing, the vertically integrated IBM enjoyed monopoly power, whichbegan to erode only in the early 1970s, as DEC’s minicomputers captured aniche of the mainframe business and institutional customers were replaced bybusiness markets. A more disruptive change followed in the early 1980s with thePC revolution, which built on the shift from business markets to consumer massmarkets. In this industry transformation, two small suppliers, Microsoft and Intel,captured the driving role, first through licensing rights and later through marketpower in microprocessors (Intel) and operating systems and application software(Microsoft). In the absence of heavy regulation, the “Wintel” duopoly contributedto the fall of IBM, the old vertical giant, by establishing a horizontal industry struc-ture.

In the wireless business, the industry value chain has been reconfigured byincreasing specialization and globalization. On one hand, the telecom monopo-lies of the pre-cellular era are history. Today, a slate of strategic groups (vendors,operators, contractors, IT firms, resellers) dominates the business. On the otherhand, most nodal points of the value chain have been globalized. The drivers ofstrategic advantages have shifted from the upstream side of the value system(proprietary technologies, domestic scale, supplier integration) toward thedownstream (open specifications, international scope, customer relationships).Concurrently, domestic, small-scale, and high-end corporate markets havebeen increasingly replaced by global, large-scale, and low-end mass consumermarkets (Figure 3-6).

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By the 3G transition, the Nordic model had won. But it was bound to fail in thelong term. As a business model, it was superior because it ensured a high degreeof globalization (which provided volume and critical mass worldwide), a low de-gree of integration (which offered greater flexibility and agility), and an arm’s-length supply chain (which, coupled with close supplier relationships, ensuredgreater competitiveness). As a geographic model, however, it was doomed. Thepopulation base has always been small in the Nordic markets. By the 3G transi-tion, wireless markets were driven by the shift from geographically constrainedstrategies to worldwide business strategies.

Today, strategies guide industry developments, which industry leaders haveexpanded and leveraged worldwide. Vendors and operators are no longer thesole agents of change. The bargaining power of new players in the value chain—contractors, platform coalitions, software and chip players, content aggregators,and service houses—is on the rise. In the past, vendors and operators competedthrough gradual globalization; today, many players are forced to globalize in or-der to compete. Concurrently, the power of the two central players – (primarilyEuropean) vendors and operators – over the value system is steadily eroding asa result of increasing specialization, industry outsourcing of manufacturing ca-pabilities to highly cost-efficient (primarily Asian) players, and the entry of the(primarily United States-based) IT leaders.

With the early 3G transition, Nokia is challenged on three sides: for customer,product, and operations leadership.

Customer Leadership. Despite its market leadership, Nokia was challengedby its traditional European-based rivals over market dominance. In the past, onlyNordic players had managed to achieve, through internationalization, the scalethat they missed in their home base. By the 3G transition, it was no longer a wayto generate revenues, just a cost of doing business. The globalizing industryvalue chain compelled all major rivals to internationalize their activities. Further-more, Nokia was headquartered in a small country far away from the currentmarket centers in the United States, large European nations, and Asia Pacific. Itsold rivals were located in central Triad locations.

Product Leadership. Despite its product leadership in the 2G era, Nokia waschallenged by a “Wintel II” attack, as Microsoft and Intel targeted mobile commu-nications. In the 2G era, Nokia had managed to fill the supermarket shelf with itsbroad product variety. Microsoft’s operating systems and application software,Intel’s hardware building blocks, and new access devices (cells, PDAs, 3G lap-tops, 3G web tablets, info appliances) rendered the vendor’s product segmenta-tion less effective. With its bundled software and operating system, Microsoftaspired to “horizontalize” mobile communications, which it considered just anot-


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her IT segment. For its part, Nokia sought to use vertical coordination, while pro-moting open specifications (via Symbian) and a proprietary standard (Series60), in order to deter Microsoft.

Operational Leadership. Despite Nokia’s operational leadership, it was chal-lenged by low-cost Asian producers. These included not only established Japa-nese players (Sony, Matsushita), but also a new generation of bolder attackersfrom Japan and elsewhere in Asia Pacific (Samsung, Kyocera, emerging Chinesesuppliers). In the short-term, Nokia could use its manufacturing properties inAsia-Pacific and fast-cycle high-volume factories to deter the Asian challengers.In the long term, the attack rested on greater cost-efficiencies worldwide.

Competitive Strengths and Weaknesses: Reorganizationand Relocation

In September 2003, Nokia changed its organizational structure “to strengthen itsfocus on convergence, new mobility markets and growth.”23 Effective as of Ja-nuary 2004, the changes followed the reorganization of Nokia Mobile Phonesinto nine business units in the spring of 2002. The new structure consists of fourbusiness groups; corporate-wide sales, marketing, logistics; manufacturing andtechnology units; and a corporate strategy, development and research unit.

- Mobile Phones will offer a global range of mobile phones for large consumersegments.

- Networks will continue to offer leading-edge network technology and relatedservices, based on major wireless standards.

- Multimedia will focus on bringing mobile multimedia to consumers vis-a-visimages, games, music and a range of other attractive content.

- Enterprise Solutions, announced already in July, will offer value to enterpri-ses by providing a range of terminals and seamless mobile connectivity so-lutions based on end-to-end mobility architecture.

Concurrently, Nokia established company-wide horizontal functions to workwith all four business groups. This was expected to enable global care of custo-mer relations and channels, economies of scale in operations, as well as betterhorizontal leverage of technologies, business opportunities and common sup-

23 “Nokia takes the next step in structuring its organization for convergence andgrowth,” Press Release, Nokia, September 26, 2003.


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port. The impact of these changes may prove comparable to the formulation andimplementation of global focus strategy in 1992. With the reorganization, Nokiahopes to address emerging challenges in the world of mobility, while continuingto build on its leadership in mobile voice communication. Increasing specializati-on, however, is not sufficient; Nokia is also coping with the globalizing industryvalue chain. In December 2003, it declared its intention to establish a new corpo-rate office in the New York metropolitan area to serve as the base for its newlyestablished Enterprise Solutions business group, the CFO’s office.24 In NewYork, the new group will be based near the majority of the sales and marketingactivities of the multimedia group’s North American operations. “The United Sta-tes is an important market for our Enterprise Solutions business group and it isimportant to be close to the key markets and customers of this business. The NewYork area is also a major financial hub and a corporate center, therefore, anexcellent location for the CFO’s office. This will enable us to have even closerlinks with investors and the financial community,” noted Jorma Ollila, Chairmanand CEO of Nokia.25

The new structure sharpened Nokia’s focus on its three potential growth are-as – low-end phones for emerging markets, high-end multimedia devices, andhand-held computers and server software for companies. However, the compa-ny must lower the cost of its phones if they are to be affordable to large numbersof people in India, Indonesia, and other emerging markets. The new multimediadivision is likely to face intense competition from Asian consumer electronicscompanies, such as Samsung, and game-console makers, such as Nintendo. Atthe same time, the new enterprise-solutions division will be squaring up to ent-renched U.S. IT giants, such as Microsoft and Hewlett-Packard. Along with effortsto cope with environmental challenges internally (reorganization)26 and external-ly (relocation of certain value activities in the United States), these changes ref-lected the impact of industry globalization in the domestic base (reconfigurationof value activities and migration from Finland).

24 The new office was expected to be operational in mid-2004.25 “Nokia to establish a new corporate office in the New York metropolitan area,” PressRelease, Nokia Corp., December 17, 2003.26 Rick Simonson and Hallstein Moerk, the chief of Nokia’s human resources, wereappointed to the Nokia Group Executive Board. Though more than 90% of Nokia’sshares are held outside Finland and more than 99% of its sales are generated abroad,Simonson, a U.S. national, and Hallstein Moerk, a Norwegian, were the first non-Finns tojoin the board.


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3.5 Finnish ICT Market

Thanks to Nokia, the specific assets of the Finnish ICT industry are in the wirelessbusiness and segments, including telecommunications, hardware, software, andembedded services. It is the common denominator of Finnish ICT industries. Ac-cording to the World Economic Forum’s (2003) Global Information TechnologyReport 2002-2003, Finland’s capabilities for participation in a networked worldare currently the best worldwide. Because of the technology infrastructure, highmobile penetration, and strong focus, Finland has served as a wireless laborato-ry since the GSM triumph of the 1990s.

Market Volume

According to IDC, the value of the Finnish ICT market was EUR 5.09 billion in2001. For 2002 the figure was estimated at EUR 5.6 billion, with a growth of 5% in2003. Over time, the share of hardware27 sales in the total ICT market has fallen toless than 40 percent of the total market, whereas software and services amountto 61 percent. The IDC estimated the value of the Finnish software market at EUR800 million, with annual growth at 6.6 percent. In the Nordic software market, thissegment has grown rapidly since the early 1990s (Figure 3-7).

In August 2001, there were more than 700 software companies in Finland.Most were small start-ups in early growth stages. At the peak of the 3G transition,the potential of these “born globals” was hyped beyond recognition. Still, manymay thrive in ICT niche segments. The businesses of these firms range frominfrastructure software and data security solutions to Internet and wireless appli-cations. They tend to have strong technological expertise, but often lack provenmanagerial capabilities and experience in product commercialization and inter-national business. The Finnish ICT market is expected to grow 10% from 2001 to2006 (Table 3-3).28

Competitive Trends

With increasing specialization and globalization, electronic business will conti-nue to lead the ICT market. Intensifying rivalry forces businesses to becomemore customer-oriented, which, in turn, necessitates attracting, building, andleveraging their customer relationships. Along with increasing innovation and

27 Sales of computers and peripherals are the primary source of hardware revenue.28

CAGR (Compound Annual Growth Rate).


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Figure 3-7 Dynamic View of the Finnish ICT Market

differentiation, firms must more efficiently and thereby seek to integrate valueactivities, especially if they operate internationally.

Consolidation

Between 2000 and 2003, stagnation of markets, the technology sector, and the3G transition has increased consolidation in the ICT industry worldwide (M&As,joint ventures, offshoring). In Finland, Nokia has avoided crises through strate-gic maneuvering and relatively high bargaining power, whereas its suppliershave suffered from escalating problems. These contractors co-evolved with No-kia until the late 1990s. Thereafter, cost pressures, location disadvantages, andinnovation squeeze have contributed to their problems. Similarly, new softwarehouses and startups no longer enjoy the GSM-related advantages of the late1990s, but must compete against U.S.-based software giants and their Asiansuppliers. Neither the contractors nor the software houses possess adequatemeans to diversify risk or to exploit relative bargaining power. Moreover, theyoung ‘born globals,’ despite their sophisticated technology development, oftenlack appropriate managerial capabilities.

3 … Nokia and its pioneering mobilehandsets and networks, and a critical massof capable suppliers…

Telecom

Software

Wireless

EmbeddedServices

2 … coupled withdiversification, reparations,cable manufacturing , anddigital R&D leads to…

1 Historically advancedtelecominfrastructure…

4 … which, throughconvergence of mobilityand Internet (UMTS, 3G),diversify into software…

5 … which, coupled with historicallyaccumulated capabilities in telecom,mobile, hardware and software, giverise to embedded service capabilities…

Hardware


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Table 3-3 ICT Trends (IDC, 2003)

Electronic banking and billingFinland is the world’s leading country inelectronic banking. About 2.5 million personsuse online banking services and marketpenetration is about 50%. In 2003, 34% of theFinns paid their bills in Internet (only 12% inbanks). Nordea (formerly Merita), a majorNordic bank, was actively ex-panding its Soloconcept, developed with Tieto-Enator, to otherNordic countries. Finnish companies developingand providing e-billing and paymentapplications include Analyste, BasWare, NovoGroup, Capella, OpusCapita, Proha, andTeliaSonera. With increasing exposure, inter-national vendors, investors and banks haveformed partnerships with Finnish firms. Finnishbanks have also been pioneers in mobile bankingsolutions, such as interactive banking throughdigital television. The number of companiesdeveloping e-banking solutions and services inFinland is relatively high. According to IDC,about 10% of bills were transferredelectronically in Finland in 2002 (1-2% in otherNordic countries).

Wireless services

In the mobile industry, the next wave of growthwill come from mobile services. Since January2002, Sonera’s UMTS network has been opera-tional in the Helsinki area, Tampere, Turku andOulu. The test network is among the firstUMTS networks in Europe that covers severaltowns. MMS (Multimedia Messaging Service)customers have been able to send multimediamessages on mobile network since June 2002.Mobile customers can send and receivemessages contain-ing text, images, graphics,drawings and voice.

Wireless entertainment and communication

Wireless entertainment industry creates,publishes and distributes entertainment servicesand games for mobile devices. The mobilegaming area is believed to hold many newbusiness possibilities in the future.

Wireless LAN

Finland has been a pioneer in many mobiletechnologies, including WLAN (Wireless Local

Area Network). There are citywide WLANs inseveral Finnish cities, including Vaasa, Mäntsä-lä, Rauma and Porvoo. WLANNet Finland Oywas founded in August 2001. The business ideais to provide wireless Internet solutions andvalue added services. WLANNet’s target isnation-wide WLAN coverage. Opened in May2002, Innopoli2, a new building for OtaniemiScience Park, is the first building in the world touse a 4G VoIP-WLAN network. The networksolution was built by the Finnish companyMerlin System.

Wireless communication and end-to-endsecurity

The proliferation of wireless and mobile appli-cations increases user awareness of Internetweaknesses and the need for security solutions,emphasizing the importance of end-to-endsecurity. As business globalization increases,users need secure, anytime/anywhere access tocompany information, producing signifi cantdemand for IP VPNs. The growth of robust,easy-to-deploy IP VPN security solutionsenables users at remote locations to safelycommunicate via the Internet, intranets, extra-nets and in distributed computing environmentsCheck Point Software Technologies Finland Oybuilds security solutions that enable secure andreliable Internet communications.

Radio navigation and telemetry hardware

Radio navigation includes location-based ser-vices: personalized information systems thatallow users access to location relevant infor-mation using wireless devices. Key customerservices are navigation systems and traffi c/weather information.

GPS chips and modules

u-Nav Microelectronics offers products andtechnology supporting both conventional andnetwork assisted GPS. u-Nav Micro-electronicsFinland Oy is wholly owned by its California-based parent company, which leads thecompany’s product and technology develop-ment.


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Wrist computers

Suunto makes watches with GPS positioningfor serious golf and sailing. Suunto alsomakes advanced watches without GPSpositioning for other sports.

Animal and human tracking devices

Tracker has made radio tracking and telemetrydevices since 1977. Its applications includeanimal tracking devices, tracking of people,emergency beacon tracking, law-enforcement,telemetry for heart rate monitors, and radiomodules for data transmission.

eGovernment

In Finland, the most significant reform in thelegislation regarding eGovernment developmenthas been the Act on Electronic Service in theAdministration (1318/1999). The EuropeanUnion has set ambitious goals for makingEurope the “most competitive and dynamiceconomy in the world”, facilitated by the neweconomy and the Internet. Finnish companieshope to exploit these developments across

Europe.

Commodification in Hardware

In Finland, the share of manufacturing in both total and ICT sector employmenthas been very high (about 40%), even in Nordic terms. The same is reflected inexports; the proportion of ICT goods of total exports is about 20%. These num-bers are often presented as “Finnish ICT manufacturing” and “Finnish ICT ex-ports.” However, they tend to reflect the unique dual reliance of the Finnish ICTcluster on a singular industry (mobile communications) and on a singular firm(Nokia). Between 1995 and 2000, the increasingly important role of hardware inthe Finnish ICT cluster was portrayed as the success story. But this was only partof the story.

In the global ICT sector, commodification pressures have always been morepoignant in the hardware segment than in software. The Finnish cluster is alsocharacterized by a relatively high ICT appliance penetration, which usually he-ralds relatively high usage levels, which in turn support transactions.29 Suchtranslation between penetration/usage (i.e., technological capabilities/businesstransactions) has lingered in Finland. Neither electronic commerce nor mobilecommerce has taken off as optimistic observers initially anticipated. Greattechnology capabilities have co-existed with few business successes.

29 About 94% of Finnish citizens had access to a mobile phone in 2002. This is thehighest rate in the Nordic countries. In 2002, 65% of the Finns were frequent computerusers, about 53% had access to Internet and about 42% had satellite or cable TV.Broadband access has also been spreading very rapidly. The number of Finnishbroadband subscribers increased by more than 400% from 2001 to 2002 (ITU).


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Software Push

As a result of convergence (mobility, Internet), as well as Nokia’s central role asthe 3G pioneer, the mobile powerhouse has rapidly diversified into software inconsumer markets (multimedia and games) and business markets (enterprisesolutions). In hardware, Nokia seeks to protect its existing market share. In soft-ware, it strives to pioneer new solutions, standards, and designs, in order todeter the challenge of U.S. based IT players. In the 1990s, Nokia’s handset ma-nufacturing provided an extraordinary growth opportunity for its contractors. To-day, its software solutions, which have already triggered an increase of softwareexports, offer risky but potentially lucrative opportunities to software enterprises.

Embedded Services

Embedded solutions comprises the Internet, wireless technologies and embed-ded processors. Security services (Virtual Private Network, VPN) provide remoteaccess possibilities for traveling personnel, as well as expertise in ICT and mobilesecurity software solutions. Wireless services and initiatives allow machines,employees, partners, suppliers, or customers to access data and complete com-merce transactions.30 Embedded software is integrated, for example, into mobilephones, telecom networks, elevators, and paper machines. Take the Finnishpulp and paper industry, which, together with its automation subcontractors, hasbeen a forerunner in developing and using advanced embedded software andmobile enabling solutions. This capability has also provided a favorable environ-ment for creating customized software products in Finland. At the moment, solu-tions based on new mobile and wireless communication technologies (e.g. WAP,GPRS, 3G mobile networks) are driving demand for new ICT services and appli-cations, and increasing the number of new vendors. Benefiting from an advan-ced mobile communications culture and expertise base, Finnish service vendorsare positioned to gain a strong foothold in this market sector worldwide. Here,too, the driving force has been Nokia.

Outsourcing

This trend comprises information systems outsourcing, as well as a growing inte-rest in application outsourcing. International vendors have also noticed thistrend in the Finnish market and several have established expertise centers in

30 Purchases may be for personal or work-related reasons, over an IP-based network,or via wireless devices, such as laptops, handhelds, and PDAs.


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Finland, focusing on IT outsourcing and application services. In 2002 the FinnishIT outsourcing market grew strongly and it continues to grow rapidly in 2003. TheIT outsourcing market reached about EUR 670 million in 2002, growing 39% over2001.

———————

As U.S. based IT firms and European-based mobile firms struggle over the cont-rol of the changing industry value chain, American companies, such as Microsoftand Intel, seek to ‘horizontalize’ the business. From this perspective, mobile com-munications will be just a segment of the PC industry, dominated by U.S.-based ITleaders. In contrast, European-based mobile businesses, led by Nokia, struggleto sustain their vertical coordination of the value chain. The boundaries of hard-ware, software, and services blur, underscoring the strategy of the Finnish ven-dor: deter the IT leaders’ horizontalization strategy, or else participate in its ownterms.

In this global rivalry, the Finnish ICT cluster is relatively insignificant. The “glo-bal chessboard” includes all core clusters and lead markets worldwide, particu-larly those that are most technologically advanced or represent the leading mar-kets. In this global rivalry, Nokia’s strategic decisions are critical to the FinnishICT cluster because that is where they are first implemented. The lesson of thenew competitive environment is that Finnish ICT firms have minimal potential toshape the industry evolution, that even Nokia’s bargaining power is relative tothat of other global strategic groups (U.S.-based IT leaders, Asian cost players,familiar European rivals) – and that the process and outcome of this global in-dustry struggle shapes the evolution of the ICT cluster.

The future of the Finnish ICT cluster will not be determined “inside out” (bydomestic drivers), but “outside in” (by global drivers). And this competitive situa-tion poses entirely new challenges and opportunities. To paraphrase the old dic-tum, “It’s the globalization, stupid.”


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4 Dynamics of the ICT Cluster

According to the cluster framework, the sources of locational competitive advan-tage comprise four kinds of cluster forces: factor, demand, related and suppor-ting, and competitive forces (see Porter 1990, 1998). Through high-quality edu-cational institutions, universities, and R&D, the Finnish innovation system provi-des infrastructure support for cluster development. At the national level, the com-petitive structure of the Finnish ICT cluster is defined by Nokia’s R&D and manu-facturing within the frame of Nokia’s global value chains in terminals, infrastructu-re equipment, and, more recently, multimedia and enterprise solutions. Relatedindustries (ICT consultancies, public and private capital, standardization) andsupporting segments (contract manufacturing, components, electronic manu-facturing) ensure vertical coordination for increasingly global firm strategies anddomestic competition. Finally, demand conditions comprise highly demandingand sophisticated buyers in the public sector, as well as business and consumermarkets. Public policies continue to shape the cluster, vis-à-vis government,competition policy authorities, regulations, standards, and public-sector de-mand (compare Steinbock 2002c, 2003f).

4.1 Competitive Conditions

In terms of world-class competition, Finland’s ICT cluster is Nokia. Historically, theFinnish ICT cluster has evolved around Nokia and strong telecom service provi-ders. At the peak of the wireless growth years (1999), the company’s domesticproduction accounted an estimated 45% of the total cluster value, while its porti-on of cluster exports amounted to 70%. In 2002, Nokia was the leading Finnishcompany, measured in terms of net sales. Some 15 percent of the top-500 Fin-nish companies (“Talouselama 500”) represented the ICT cluster, including elec-tronics, telecommunications services, IT, media, wholesale trade, or businessservices. The core of the ICT cluster includes Nokia’s mobile handsets, networks,multimedia and enterprise solutions. For most practical purposes, the strategyand internal organization of Nokia define the course of the Finnish ICT cluster.


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Both are characterized by strong polarization — several large players and avariety of small companies, with few medium-sized companies.The number ofmedium-sized companies is low. With its EUR 30 billion in net sales, Nokia’s domi-nance was both relative and absolute. The combined net sales of all other top-50ICT firms amounted to some EUR 15.3 billion — 50% less than Nokia’s (Table 4-1, Table 4-2).

In 2001, more than 2,000 foreign-owned companies operated in Finland,employing 176,000 persons. Their total turnover was EUR 45 million. By 2002,one fourth of these foreign companies locating in Finland were ICT companies,66% of which were greenfields. Most ICT investments came from Sweden and theUSA. There were close to 6,700 ICT companies in Finland, with an aggregateturnover of EUR 44 billion and total personnel of 124,000. The relative share offoreign-owned companies in total Finnish ICT companies amounted to 5.2%, yettheir aggregate turnover was close to 18% and personnel more than 20% of thetotal.

Along with Nokia, the core Finnish ICT firms comprise three quite differentstrategic groups: telecom service providers, IT firms, and foreign IT subsidiaries.

Table 4-1 ICT Companies in Finland (2001)

ICT Companies in Finland Number Turnover Personnel• Million

Finnish ICT Companies (Total) 6,677 43,767 123,811Foreign-Owned ICT Companies (Total) 348 7,763 25,326

5.2% 17.7% 20.5%

* Including branches.

SOURCE: Statistics Finland.


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Table 4-2 Finnish Top-50 ICT (2002) Empl.

TE-500 250IT Name For. Abroad Industry HQ NetSales ROI Employ-2002 2002 Owner (%) • (Mil) (%) e e s

1 1 1 Nokia* 5 7 Telecom Eqpt Espoo 30,016 35 52,7142 20 2 Sonera* 1 2 Telecom Access Helsinki 2,241 -62 8,1693 22 Elcoteq Network* 8 8 Components Lohja 1,840 9 8,1274 29 3 Elisa* 12 Telecom Access Helsinki 1,563 -4 8,1155 36 4 Tieto-Enator* IT Services Espoo 1,271 1 7 6,7736 5 GNT Finland* Wholesale Trade Tampere 515 1 6 3597 6 Siemens* 33 Telecom Eqpt Espoo 411 30 1,6408 7 Hewlett-Packard IT Eqpt Espoo 394 16 6249 101 8 IBM Yes IT Eqpt Helsinki 38310 104 Perlos* 37 Components Vantaa 365 2 3,64111 107 Flextronics* Yes 0 Components Hameenkyro 356 -11 1,71112 119 9 Novo Group* 5 IT Services Helsinki 309 13 2,25713 123 Panasonic* Yes WholesaleTrade Helsinki 2901 4 125 1 0 Fujitsu Invia* Yes 2 2 IT Services Helsinki 282 2,26515 127 Salomaa* Advertising Helsinki 275 15 7001 6 128 1 1 Tellabs* Yes Electronics Espoo 274 1,27017 143 Eimo* 57 Components Lahti 252 18 7301 8 148 1 2 Sanmina-SCI EMS

Haukipudas Yes Telecom Eqpt Oulu 244 -9 89019 152 Scanfil* Components Sievi 237 2 1 1,3822 0 158 Microcell* Yes Components Oulu 228 7092 1 160 1 3 Tech Data Finland* Yes WholesaleTrade Espoo 223 12622 14 Canon North-East WholesaleTrade Helsinki 185 25 1102 3 188 Aspocomp* 6 3 Components Vantaa 183 -10 3,0752 4 193 1 5 Finnet* Telecom Svs Helsinki 176 32525 16 Scribona Distribution* WholesaleTrade Espoo 174 -3 1442 6 204 1 7 Compaq Computer Yes IT Eqpt Espoo 168 3 0 3432 7 222 1 8 LM Ericsson Yes Telecom Eqpt Kirkkonummi 155 1 4 97528 19 YIT Primatel Telecom Access Helsinki 146 63 1,7242 9 229 2 0 Atea Finland Yes IT Services Vantaa 146 15 24230 243 21 Elektrobit* Telecom Eqpt Oulunsalo 136 1 1,2783 1 248 PKC Group* Components Kempele 134 1 8 52132 250 22 Auria TelecomAccess Loimaa 133 20 74733 254 Salcomp* Yes 74 Components Kemijarvi 130 0 1,58134 267 23 Canon Yes IT Eqpt Helsinki 122 9 4853 5 271 DDB Helsinki* Yes Advertising Helsinki 120 32036 293 Filtronic LK Yes Components Kempele 108 5 0 8413 7 2 4 Accenture Holding* Consulting Helsinki 102 4753 8 311 2 5 Proha* Software Espoo 101 1 75339 328 Philips Yes WholesaleTrade Espoo 9 6 3 3 9 64 0 330 Carat Finland* Yes Advertising Helsinki 95 18 4841 331 26 Fujitsu Siemens

Computers Yes IT Eqpt Espoo 93 5542 356 Fonecta* Yes Business Services Helsinki 85 98143 365 Sony Finland Yes Wholesale Trade Espoo 82 5544 366 27 Song Networks* Telecom Access Espoo 82 39645 392 28 Kuopion Puhelin* Telecom Svs Kuopio 7 6 6 11846 395 29 Powerware Yes IT Eqpt Espoo 75 27 4,46647 402 Pool Media Inter-

national Yes Advertising Helsinki 73 29 404 8 405 3 0 WM-Data Finland* Yes IT Services Vantaa 72 54049 424 Incap* Components Helsinki 69 6 1,2795 0 427 Sanmina-SCI EMS Yes Components J:kylan mlk 69 17 56

Haukipudas

SOURCE: Talentum (Talouselämä 500, IT 250).


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Telecom Access and Service Providers

The number of fixed-line subscriptions in Finland peaked in 1997, at 2.9 million.Thereafter, the explosion of digital cellular (GSM) captured volume leadership. In2002, the number of fixed-line subscribers was at 2.7 million, whereas the num-ber of mobile subscribers exceeded 4.5 million. Concurrently – between 1998and 2002 – the total turnover of the operators increased from EUR 3,270 millionto EUR 5,012 million. In 1998, mobile communications represented only 35.6percent of the total; by 2002, it had increased to 45.2 percent, while data trans-mission amounted to 11 percent. Together, mobile communications and datatransmission accounted for almost 56 per cent of the operators’ aggregate turno-ver. Two mobile operators, Sonera and Radiolinja, were active in launching newmobile communications applications, which intensified the development of smallenterprises. The largest operators had only 12 percent of their personnel abroad.

Sonera

Sonera’s roots stretch back to the 1855 construction of Finland’s first telegraphline by the Russian military during the Crimean War. In 2001, Sonera’s salespeaked at $1,949 million, with a net income of $365 million. In 2002, the operatorprovided mobile phone service to 2.5 million subscribers on its GSM network.31

That year, the operator and its 10,500 employees were acquired by Telia, theformer Swedish telemonopoly. The senior executives failed to negotiate strategicalliances and joint ventures with global players, despite pioneering first mobileservices and m-commerce.32 By fall 2002, several top executives and employeeswere also charged for the abuse of employee call records in efforts to stop pressleaks. On the other hand, while the Finnish telecom authorities initiated deregu-lation after the U.K. in the early 1980s, privatization had taken years.33 Finland’sgovernment owned a 53% stake in the company, which the Parliament decided tosell. Still, Sonera purchased stakes worldwide, pioneered new services, and join-ed an over-priced multinational bid on German 3G mobile licenses (Orange laterwithdrew, leaving Sonera with a 43% stake).

31 Sonera provided fixed-line voice and data services and operated about 770,000 localaccess lines, while its fiber-optic network extended from major Finnish cities to the U.S. Italso owned stakes in several telecom carriers in Europe, Russia, and Hong Kong.32 Sonera sold a 15% stake in Zed to Yahoo!, which sold back its stake in January 2004.33 Renamed Posts and Telecommunications in 1981, the Finnish company became astate-owned enterprise in 1990. In 1994, it became a holding company (PT Finland) withtwo subsidiaries: Finland Post and Telecom Finland. Three years later, the Parliamentapproved partial privatization of PT Finland, which was renamed Sonera. In 1988, thegovernment floated 22% of the company to raise capital; a year later, it sold another 20%of the company.

Differentiation

Low

Path 1

• Innovation and execution of

global services

• Wireless Internet acquisitions

• Partnerships

Path 2

• Services distribution

• UMTS

• Consolidation

• Fast

• First

• Different

3G Winners

Zed

Sonera SmartTrust

Across Wireless

and ID2

Baltic

Mobile

Turkcell

US Wireless

German UMTS


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Aspiring to become a global services leader in mobile communications, Sone-ra aggressively developed and incubated pioneering service businesses, whilesecuring international distribution (e.g., Baltic operations, Turkcell stake in Tur-key, 3G stakes in Germany, Italy, Spain, and Nordic countries).34 The “dual-trackstrategy” built on first-mover advantages, which were expected to evolve intostrategic advantages (Figure 4-1).In 2001, poor stock performance led the go-vernment to dismiss most of Sonera’s board and streamline its operations. InDecember 2002, Sonera was acquired by Telia. With its 8.6 million fixed lines, 9.8million mobile subscribers and more than 17,000 employees, TeliaSonera’s sa-les amounted to $6.9 billion in 2002. It has telecom investments in nearly 30countries, including the Baltic states and major European markets. The Swedishstate owns 45 percent and the Finnish state some 19 percent of TeliaSonera.

Figure 4-1 Sonera’s “Dual-Track” Growth Strategy

34 Having pioneered the new mobile services, including wireless Internet access, theoperator launched Sonera Smart Trust subsidiary, which allowed mobile phone users tomake purchases with their handsets, and a wireless Internet portal (Sonera Zed), whichused SMS (short messaging service) and WAP (wireless application protocol)technologies.

SOURCE:Steinbock (2002) Sonera’s Strategy

Service

High


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Others

In 2002, Sonera, with its EUR 2,241 million in net sales and EUR 3,858 million totalloss, was one of the top-500 Finnish companies, along with a handful of otheroperators (Elisa, Finnet, Auria, Song Networks and Saunalahti).

Elisa. Formerly Helsinki Telephone, then Elisa Communications, Elisa isFinland’s second-largest operator whose net sales amounted to EUR 1.6 billionin 2002. Through its principal subsidiaries, Elisa provides a variety of telecomservices, including wireline and wireless voice, data, and Internet services. Thecompany also offers data and voice network support services for businesses.Another unit, Comptel, develops mediation software services for communica-tions providers in more than 50 countries. Elisa subsidiary Radiolinja, which pio-neered the 2G GSM services in Finland, oversees the company’s wireless net-work. Through roaming agreements, Radiolinja extends to some 80 countries.Focusing on its mobile operations, Elisa plans to upgrade its wireless networkswith high-speed 3G systems and expand its international operations. Obtaining86 percent of its revenues in Finland, the company offers services in Finland,Germany, and the Baltic republics.

Auria. In 2002, the Auria Group, one of Finland’s top-500, had 133 million inrevenues, 719 employees, and 130,000 fixed customers in Southwest Finland. InSeptember 2003, TeliaSonera Finland began to acquire full ownership in theAuria Group and, to boost synergies, sold several of its fixed line business toAuria for EUR 22 million.

Song Networks. Originating in 1996, when Tele1 Europe was founded and aSwedish operator license was approved, Song Networks operates a pan-Nordicfiber-optic network providing voice and data services. With EUR 82 million in netsales and 396 employees, its customers are connected to the company’s back-bone network through local access loops in the region’s largest urban centers.Song Networks has sold its consulting services unit, which provides managementof clients’ telecom systems, and it has outsourced its mobile resale business. Anagreement to acquire Telenor’s business services unit in exchange for a stake in thecompany, which was part of Song Networks’ financial restructuring, was scrapped.

Saunalahti Group Oyj. Saunalahti Group originated in 1994, when the firstcommercial Internet ISPs began operations in Finland. Four years later, 12 firmsconsolidated their activities in Saunalahden Serveri Oy, an ISP which soon founditself in multiservice activities, vis-à-vis mobile and Internet portals. Eager to in-ternationalize, the Group assumed a new name, Jippii Group, in 2000. As thetechnology sector crashed, the concern divested foreign activities focusing onInternet and telecom services in Finland, and on mobile entertainment internatio-nally. Today, it provides Internet and telecommunications services in consumermarkets (Saunalahti) and business markets (EUnet Finland), as well as interna-


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tional mobile entertainment services (Jippii). In 2002, its net sales amounted toEUR 62 million and it had 210 employees.

Major Foreign IT Firms in Finland

Toward the end of the 1990s, Finland became a test bed for R&D by a number ofmultinationals, including ICL, IBM, Siemens, Hewlett Packard, Ericsson, and Lo-tus. These ICT manufacturers intensified cooperation with local firms, and someentered the market by acquisitions. In 2000 – at the peak of Nokia’s rapid growthperiod – some 36 Finnish-based R&D units served as knowledge sources ortraining centers from which employees were sent to other units to distribute thelatest information on technology development in wireless communications (Paija2001). Lacking historical depth, contemporary studies often exaggerated therole of these firms. In reality, many and certainly the largest, had had a substan-tial presence in Finland since the 1960s and 1970s. The “mobile Internet” boomdid not change incremental trends. In 2002, 50 to 60 percent of the employees ofthe leading foreign IT firms were abroad.

Some 15 percent of the top-500 Finnish firms are ICT players. Of these 70firms, about 40 percent are owned by foreign ICT firms. The top-8 generate EUR200 to 400 million in net sales and have 100 to 2,300 employees. The firms rep-resent several strategic groups, including IT (IBM, Fujitsu Invi, Compaq), electro-nic manufacturing services (Flextronics, Sanmina-SCI), telecom equipment andcomponent providers (Tellabs, Microcell, LM Ericsson), and wholesale trade (Pa-nasonic, Tech Data). Typically, IT and wholesale players are located in greaterHelsinki, whereas several EMS and electronics firms are in the Oulu region.

Since the entry of Siemens and Ericsson in the 1880s, foreign firms have hada presence in the Finnish ICT market. The rapid growth of Nokia and the subse-quent expansion of the Finnish mobile business attracted advanced and largestICT companies, many of which have established joint-ventures and centers ofexcellence in Finland. Some of the more recent examples include the following:

IBM (Finnair, FPIC). In July 2002, Finland’s flag carrier airline Finnair and IBMjoined forces to develop innovative e-business solutions (wireless check-in, e-ticketing, and Internet and wireless ticket sales), The joint venture, Aerosystems,employed about 200 persons. In April 2003, IBM announced the establishment ofits European Forest and Paper Innovation Centre (FPIC) in Finland, which woulddevelop business practices and processes, emerging technology solutions, ande-business solutions for the forest and paper industry.

Honeywell. In December 2002, Honeywell, a leading global provider of cont-rol technologies, aerospace products, and technology-based solutions and ser-vices, announced that it would set up a new unit in Finland to develop equipmentfor measuring the optical characteristics of paper.


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Sonera (Accenture, Telia). In May 2002, Sonera and Accenture announcedthat they would co-develop and jointly market a mobile application service provi-der (ASP) offering across Europe. As part of the non-exclusive agreement, Ac-centure and Sonera would jointly provide research and development and profes-sional services to support their customers.

Fujitsu (Nokia). In February 2000 Fujitsu (ICL) and Nokia formed a joint ven-ture to support Nokia Information Management’s e-business development. Thenew Nice-business Solutions Finland Oy focused on developing solutions andservices for Nokia’s e-business and customer relationship management (CRM)needs.

Others. In addition to these initiatives, EDS, IBM, Hewlett-Packard (HP Ba-zaar), and Siemens had centers in Finland in which they developed mobile solu-tions and services.

4.2 Related and Supporting Industries

Unlike most wireless vendors and many other ICT manufacturers, Nokia has notintegrated backward into component production. Instead of vertical integration,it relies on vertical coordination. The tradeoff ensures independence of basictechnologies, which is useful in the CDMA era, but it also renders the companydependent on suppliers. Due to the changing competitive opportunities in thewireless value chain, the role of these industry participants, along with operators,is critical to industry leadership. Indeed, the importance of local suppliers in rela-ted and supporting industries, coupled with local demand conditions, underliesthe fundamental role of clusters of interconnected industries. These includespecialized suppliers, service providers, downstream industries, informationproviders, firms in related industries, and associated institutions, such as tradeassociations, standards-setting agencies, and universities.

Nokia and the Role of Outsourcing

In the late 1990s, the Finnish supplier sector has focused on highly customizedinputs while in standard components - requiring large scale and effective distri-bution channels - Finnish OEMs rely on imports. No less than 92 percent of theelectronic component market value is composed of imports (Hienonen 2000).There are some 240 companies in the field whose total value of gross productionhas grown at an average rate of 25 percent over the last five years. (Ministry ofTrade and Industry, 1999). In Finland, Nokia is the key client of the supporting


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sector, accounting for 50 to 100 percent of the sales of these suppliers. But itsrole as the driver of outsourcing is rapidly changing because of industry globali-zation.

In 2002, Nokia Mobile Phones operated 17 manufacturing facilities in ninecountries around the world. It used outsourcing to complement its manufacturingactivities. That year, outsourcing covered an estimated 15 to 20 percent of themanufacturing volume of mobile phones. Nokia Networks had seven productionfacilities: four in Finland and three in China. In line with the strategy to investresources in key areas to improve efficiency, over 60% of Nokia Networks’ pro-duction was outsourced, in addition to some support activities (Nokia, 2003). Inother words, the growth of Nokia’s production volume and outsourcing, togetherwith increasingly sophisticated needs of some other companies, has generatedan ever-growing number of new suppliers in Finland and in other core clustersand lead markets.

In Finland, the indigenous ICT cluster is thought to provide a foundation forglobal activities.35 In reality, this foundation is shaped by the globalizing industryvalue chain, not just Nokia. As long as the industry was domestic or regional (untilthe mid- and late 1990s), the suppliers in Finland benefited the most. As theindustry is globalizing, proximity to local suppliers of the specialized components,machinery, and services is no longer necessary to gain access to inputs, whichcan be sourced globally. Instead, the advantage builds on efficiency, knowledge,and ease of innovation. These competitive realities have compelled Finnishcontract manufacturers and EMS and ODM firms36, parts and componentsplayers, and ODM firms to expand through internal and external growth (M&As),in order to follow their lead customer to foreign markets, particularly China.

As suppliers’ global presence has become increasingly important for efficientoutsourcing, great growth opportunities have been created for suppliers that areable to manage rapid growth. But risks have been elevated for relatively smallFinnish firms. Because foreign investment decisions cannot rely on single-custo-mer relationships, these companies have struggled to achieve greater diversifi-cation. Concurrently, the consolidation of the global contractor business hasposed new threats in the form of intensifying global competition (Steinbock 2002,particularly Chapter 12). Through its supplier relationships and bargaining po-wer, Nokia has managed to secure adequate inflow of components, even duringglobal shortage, whereas the relatively small suppliers remain more vulnerable,due to relative difference in scale and scope.

Providing generic technology, the ICT cluster involves a changing and gro-

35 “In the recent years, the structure of the [Finnish] ICT cluster has reached sufficientscale and scope to support competitive global operation” (Paija 2001).36 Electronic manufacturing services (EMS); original design manufacturing (ODM).


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wing number of related industries, producing complementary or value-addingservices to the infrastructure. The industries with the most promising prospectshave been those focusing on software, security, IT services, media, and financialservices. In 1999, the government also initiated the inter-ministerial agenda forthe Content Finland Program to encourage Finland’s development into a leadingprovider of content industrial products.37

Major (Non-Nokia) ICT Firms

The major non-Nokia ICT firms include a number of strategic groups, includingNokia’s suppliers, software, security, IT services, media, and financial services.Of these companies, Nokia’s suppliers play a key role. In the domestic market,special competence can be found in contract manufacturing of parts and compo-nents, EMS and ODM, automation and precision mouldings.

Nokia’s Suppliers. These indigenous ICT firms have emerged and evolvedsymbiotically with Nokia (Figure 4-2). Despite different performance capabili-ties, all of these firms generate a significant proportion (60 to 90 percent) of netsales from Nokia. Since 2000, they have made efforts to diversify and reducetheir dependency. Employing an average of 1,500 to 3,000 people each, theyare led by Elcoteq Network (EUR 1,840m in net sales, over 8,100 employees),Perlos (EUR 365m, over 3,600 employees) and Eimo (EUR 252m, over 1,900employees). As Nokia and other original equipment manufacturers focus increa-singly on brand and marketing, the suppliers are rushing into production, design,and R&D. Strategically, only Elcoteq continues to focus on electronic manufactu-ring services. Others have garnered new revenue sources in the car industry,pharmaceuticals, and industrial electronics. Some have also increased activitieswith Nokia’s rivals. All have engaged in offshoring production to low-cost loca-tions, typically China and transitional economies. Despite some protectionist cri-ticism in Finland, the offshoring of production is, in effect, critical for the indigeno-us suppliers to compete with non-Finnish industry giants.

The key locations and lead markets of these suppliers continue to emulatethose of Nokia. Most make 60 to 95% of their net sales in Europe. Through M&As,some have increased their properties in the United States, the core cluster ofelectronics. Others have rushed to Asia Pacific, seeking to establish productionsites in China. As long as Nokia invested in Finland, so did the suppliers; as Nokiaglobalized, the suppliers followed. And as Nokia initiates the migration of its head-quarter functions and business units, so will the suppliers. As a result, all will

37 The objective was to support Finnish content production, including the digitalization ofcultural heritage, the production of digital learning materials, the creation of new digitalservices, and the development of systems supporting content producers.


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continue to invest in the business, but no longer in Finland primarily.

Figure 4-2 Worldwide Locations of Elcoteq and Perlos

Software Firms. Unlike suppliers, whose reliance on Nokia is direct, Finnishsoftware firms are reminiscent of IT services, whose reliance is more indirect.Since the 1980s, equipment manufacturers, such as Nokia and Ericsson, haveevolved alongside mobile operators. These operators are the primary clients ofthe Finnish software firms. With analog cellular (1G), software firms barelyplayed a role. Their significance has increased along with data communications,starting with the GSM in the early 1990s and exploding with the mobile Internet atthe end of the 1990s. The crash of the technology sector, the birth pains of the3G transition, and the costly bids for the mobile licenses have constrained thegross investments of the operators. As a result, the software firms –players suchas Proha, Aldata Solution, Comptel, Tekla, Tecnomen, Basware, Solteq, and QPR –

Elcoteq Network

Perlos


89

have struggled for survival. Like IT services, most software firms tend to be inGreater Helsinki. With 100 to 800 employees and EUR 10-100 million in net saleseach, the software firms tend to be twice as large as IT service houses, but muchsmaller than Nokia’s suppliers. Like the leading IT service houses, software firmswere eager to internationalize at the end of the 1990s. Today, however, the keywords are specialization, focus strategies, and consolidation.

Security Software. A segment of software, the leading security firms co-evol-ved with Nokia. Like software players, they are relatively small, with EUR 20 to 40million in net sales and 150 to 400 employees each. All of these firms are ingreater Helsinki. Like the software and IT service players, the security firms de-pend on large mobile and IT corporate clients and, therefore, have been hurt bytheir clients’ stagnation. Like many other IT players, most security leaders mis-took their hype for market reality in the late 1990s. As a result, they have enga-ged in focusing and cost-cutting. Unlike the industry leaders (Sumantec, CheckPoint), the Finnish players lack scale. With increasing consolidation in the in-dustry, the slow internationalization threatens to undo the achievements of thegrowth years. Narrow product portfolios mean narrow markets, which translatesto declining market shares. In 2002, all leading Finnish security firms demonstra-ted negative growth and negative return on invested capital.

IT Services. The IT service specialists – Done Solutions, Sysopen, TJ Group,Satama Interactive, and Iocore – concentrate on e-commerce solutions and theservices to build them. Some of these firms also offer software and consulting.With 200 to 400 employees each, they are small players in the Finnish ICT clus-ter. In 2002, none of them were among the top-500 Finnish firms. All of themsought large corporate clients and were located in Greater Helsinki. Several hadco-evolved with Nokia’s rapid growth in the late 1990s, when they also nurtureddreams of internationalization. With the 3G transition and the stagnation ofNokia’s growth, co-evolution strategies crashed. After 2000, these firms develo-ped their own strategies – typically, differentiation, cost advantage or focusing.In 2002, the net sales of the key players were around EUR 14 to 32 million.

Financial Services. Through its electronic services, Nordea, an investor inand client of Nokia and Sonera, initiated its own experiments in text-based com-puter banking. The self-service technology originated from 1982, when bankingfrom home via the phone was introduced. PC-based banking followed in 1984,ATMs in 1989, Internet-based banking and mobile phone banking in 1996, andWAP-phone banking in 1999. Through its Solo system, Nordea had over 2 millioncustomers by the end of 2000, while the Finnish banking industry was the worldleader in Internet banking.

Media. Since the 1980s – and the subsequent PC and Internet revolutions –information technology, mobile communications and media have been rapidlyconverging. The old industry boundaries no longer count; the distinction bet-


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ween ‘old media’ and ‘new media’ no longer holds (see Steinbock 1995, Yoffie1997, Steinbock 2000). In Finland, media is highly concentrated. Sanoma-WSOY dominates in print publishing, with EUR 2.4 billion in net sales and over15,200 employees. In broadcasting, the Finnish Broadcasting Co. (Yleisradio),the old public-sector giant, remains a substantial presence, along with the mediaand publishing properties of Alma-Media. Located in Turku, TS-Yhtyma is a st-rong regional presence and is increasingly exploiting the potential of the newmultimedia. Unlike Nokia’s suppliers, software and security, as well as IT servicefirms, Finnish media, until recently, had its distinct evolutionary path. But the riseof the Internet and wireless – i.e., digitalization and mobilization – are now trans-forming media as well. Except for Sanoma-WSOY (39 percent of employees ab-road), the problem is a low degree of internationalization, which has preventedFinnish players from distinguishing themselves in the worldwide technology sec-tor.

4.3 Factor (Input) Conditions

In the past, the Finnish innovation system is said to have adapted well to newcircumstances (Georghiou et al. 2003, p. 57). Yet, the changing industry envi-ronment poses external threats and risks which have challenged Finnish firmsand innovation system since the late 1990s, particularly due to the specializationand globalization of the wireless value chain (Steinbock 2002). The classic noti-on of comparative advantage typically refers to the cost and availability of inputs.Factors of production are the basic inputs to competition, including land, labor,capital, physical infrastructure, commercial and administrative infrastructure,natural resources, and scientific knowledge. Before the era of rapid globalizati-on, general-purpose inputs (for instance, high-level education) often ensured acompetitive advantage. Today, they are necessary to avoid a competitive disad-vantage but no longer suffice to achieve a locational advantage. Instead, theadvantages of a location for productivity competition stem from high quality, par-ticularly specialized inputs (e.g., skills and capabilities, applied technology, re-gulatory regimes, legal processes, information, sources of capital in particularindustries). In Finland, the presence of the public sector has been most salient inthe factor conditions, starting with the development of technology policy in the1980s, and the implementation of the exports-driven cluster strategy in the early1990s. The driver role of the public sector once served as the core capability ofthe Finnish ICT cluster; today, it reflects the cluster’s primary vulnerability.


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Finnish Innovation System

In contemporary Finland, national science, technology, and innovation policiesare formulated by the Science and Technology Policy Council (STPC), which ischaired by the Prime Minister. The two organizations with primary responsibilityfor S&T policy are the Ministry of Education and the Ministry of Trade and In-dustry. The Ministry of Education is in charge of matters relating to education andtraining, science policy, institutions of higher education, and the Academy of Fin-land. The Ministry of Trade and Industry deals with matters relating to industrialand technology policies, the National Technology Agency (Tekes), and theTechnical Research Centre of Finland VTT. Nearly 80% of the government rese-arch funding is channelled through these two ministries. The Academy of Finlandplays the key role in funding basic research, whereas Tekes’s task is to promoteR&D. Other central public sector players comprise Sitra (the National Indepen-dence Fund), Finnvera (Export Credit Agency), Finpro (Association for interna-tionalization services) and Invest in Finland.

Finnish Higher-Education and S&T Policy

The standard of education has risen sharply in recent decades. In internationalterms, Finland is at the European level. The proportion of young people in edu-cation is very high. Instruction is usually free of charge at all levels; there are notuition fees.38The Finnish higher education system comprises two parallel sec-tors: universities and polytechnics. The polytechnics were established duringthe reform process of the 1990s. Today, a network of 29 polytechnics covers theentire country. There are 20 universities in Finland, including 10 multi-facultyinstitutions and 10 specialist institutions. Of the specialist institutions there arethree universities of technology, three business schools, and four are art acade-mies.39 The universities engage in both education and research and have theright to award doctorates. Until recently, the national innovation system, particu-larly the funding regimes, have been strongly oriented toward technology;technology universities and technology-driven polytechnics have been the pri-mary contract partners of public and private R&D actors (Steinbock, 2003e). Aslong as the ICT cluster competed in a domestic, supply-driven value chain, the

38 Spending on public education accounts for 13 percent of all public expenditure. Twothirds of this consists of state funding and one third of municipal funding. Publicexpenditure on education was 6.2 percent of GDP in 1997. Regional differences ineducation remain, and social background still affects educational choices.39 Higher Education Policy in Finland, Ministry of Education (Helsinki: 2000).


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impact of this bias was negligible. As the industry value chain becomes globaland demand-driven, relatively low investments in business core concentrations,particularly international business, contribute to deteriorating competitiveness.The problem has been acknowledged (FHEC, 2003), but new models are onlynow being identified and debated. The implementation of corrective measureswill take several years.

S&T Policy

The evolution of the Finnish S&T policies evolved in three major phases: (1)building the basic structures in the 1960s and 1970s, (2) technology orientationphase in the 1980s, and (3) the era of building the knowledge-based society andnational innovation system in the 1990s. The shifts in policy design are said toreflect the changes in industrial and technological specialization as well as reac-tions to changing policy priorities in other OECD countries (Lemola 2002). Befo-re the 1980s, the Finnish innovation system imitated Swedish policy doctrines.By the late 1980s, the OECD provided the benchmarks for national innovationsystems. The third phase began when the STPC embraced the notion of the“national innovation system” and later that of “knowledge and know-how” by theOECD (compare Lundvall 1992, OECD 1999, 2003).40

As Finnish R&D expenditures accelerated in the 1980s, Finland became thefirst country to embrace the concept of a national innovation system, as the foun-dation of its S&T policy. The inclusive framework of the national innovation sys-tem extends from education and science policy (Ministry of Education, Academyof Finland, universities) to technology policy and R&D (Ministry of Trade andIndustry, Tekes and Sitra) and even internationalization (Finpro). It emulates theobjective of the welfare society to care for its citizens “from cradle to grave.”

R&D

In 2002, Finland’s relative R&D was one of the highest in the world, right behindIsrael and Sweden. It amounted to 4.9 billion euros (3.4 percent of GDP) (Figure4-3). Finnish firms account for 70 percent of the total, and the public sector ma-kes up the remaining 30 percent. The public sector has been particularly suppor-tive of R&D in telecommunications. With the private sector and Finnish research

40 The most recent innovation ideology emphasizes four viewpoints: learning by doingand using, the importance of education and the R&D system, the development andlaunch of new technologies, and the ability to cooperate nationally and internationally.


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institutes, Tekes jointly sponsored a program, “TLX: Creating a Global Village,”which provided FIM 710 million ($120 million) over three years to fund technologydevelopment, including 3G and 4G wireless systems and wireless value-addedservices. This initiative was coupled with the funding of the “Electronics for theInformation Society Program” and a research program in “Teletronics” by theAcademy of Finland. Tekes also funds R&D programsconducted in small andmedium sized enterprises. Meanwhile, private sector funding—outside of themajor equipment providers and carriers—for mobile applications has becomewidely available, as well. According to the venture capital firm Eqvitec, $2 billion inventure capital was made available in a year and a half, at the peak of the mobileexplosion (Maheshwari, 2000).

Figure 4-3 R&D Input in Some OECD Countries

Regional Innovation

Since the 1990s, the Finnish innovation system has witnessed strong growth inprivate R&D financing, a determined public effort in researcher training, and therising importance of regional development. Since the end of the 1990s, Finnishnetworks of higher education institutions, technology centers, centers of experti-se and excellence and other comparable players have promoted regional inno-vation. From the standpoint of the Finnish ICT cluster, these developmentstranslate to extensive national and regional capability-building investments, vis-à-vis the key actors the national innovation system in Finland. Given the techno-

SOURCE:OECD, Main Scienceand TechnologyIndicators.


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logy orientation of the Finnish innovation system, these developments havestrongly reinforced the ICT cluster.

Financiers

Launched in 1983, the National Technology Agency (Tekes) was created to en-sure the competitiveness of traditional industrial clusters, while creating new in-dustry. Tekes cooperates with several partners, particularly the Academy of Fin-land. At regional level, the technology policy is implemented by the T&E centers(Employment and Economic Development Centers). From the standpoint of theICT cluster, Tekes is the primary public financier of the ICT sector, whereas theT&E centers provide both business and technology core capabilities. Sitra (Na-tional Independence Fund) was set up in 1967. It focuses on research and trai-ning, innovations and business development, and venture capital. In the ICTcluster, Sitra serves as the primary public venture capitalist. The Academy ofFinland is an expert organization in research funding and science policy and hasinternationalized rapidly, particularly since the late 1990s. In 2003, Academysupport for research at Finnish universities and research institutes amounted toEUR 185 million (over 13 percent of total government research funding). Fourresearch councils decide on research funding within their respective fields. Fromthe viewpoint of the ICT cluster, the Research Council for Natural Sciences andEngineering is primary.

R&D Operators

VTT Technical Research Centre of Finland is a contract research organizationinvolved in many international assignments. With its 3,000 employees, VTT pro-vides a wide range of technology and applied research services for its clients,private companies, institutions and the public sector. VTT’s turnover is aboutEUR 220 million, and it serves annually over 5000 domestic and foreign custo-mers. Most of VTT’s operating units involve the ICT cluster (including electro-nics, IT, industrial systems, processes). VTT’s research institutes are locatedmainly at Espoo, Tampere, Oulu, and Jyväskylä — Finnish cities where Nokia hasa substantial presence. 41

Centers of Expertise (CoEs). In the late 1990s, the Center of Expertise Pro-gram was created in accordance with the Regional Development Act, whichsought to pool local, regional, and national resources in selected internationallycompetitive fields of expertise. The Council of State extended the program by

41 VTT has also some activities in Turku, Vaasa, Nurmijärvi, Lappeenranta, Outokumpu,Varkaus, Kajaani, Kuopio, Raahe, Hämeenlinna and Joensuu.


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nominating new CoEs (14 regional centers, two nationally networked CoEs) for1999 to 2006. Concurrently, the scope of the CoEs was broadened from thetraditional high-tech sectors to include new fields, such as new media, culturalbusiness, and design. The CoEs relating to the ICT sector are concentrated infour cities. Information Technology is in Jyvaskyla, South-East Finland, Oulu,Tampere, and Helsinki, Telecommunications and Data Technology are in Oulu,and Communications and New Media in Tampere and Helsinki.

Employment and Economic Development Centers (TE Centers). The TE Cen-ters originate from joint efforts by the Ministry of Trade and Industry, the Ministryof Agriculture and Forestry, and the Ministry of Labor to combine their regionalforces. A total of 15 centers countrywide provide comprehensive advisory anddevelopment services to small and medium-sized enterprises, particularly ICTfirms. They promote technological development in enterprises and assist withexport activities and internationalization.

Science Park Program. Finnish Science Park Association (Tekel), with itsEUR 100 million turnover, is a nationwide cooperation network connecting 22technology and science parks in Finnish university cities. The Tekel parks pro-mote enterprises implementing innovative research into business (“to be see-ded, to grow and internationalize”). The Tekel science parks house some 1,600enterprises and public organizations, bringing together 32,000 experts workingon different technology fields like information, telecommunications, new media,environmental, energy, life sciences, health and medical technology. The ICTsegments are the core of the Tekel network.

Centers of Excellence. In the late 1990s, the Academy of Finland, in coopera-tion with the National Technology Agency (Tekes), developed a national strategyfor the centers of excellence in research. The Academy is the primary funder ofthese programs, while Tekes participates as a contributor. In 2002, 42 centers ofexcellence were funded through the national program. Several centers focus onprograms that support the ICT cluster, including Smart and Novel Radios Rese-arch Unit (Helsinki University of Technology), Formal Methods in Programming(Åbo Akademi University), and From Data to Knowledge Research Unit (Universi-ty of Helsinki, Helsinki University of Technology).

Graduate Schools. The graduate schools established in 1995 have greatlyincreased the opportunities for full-time postgraduate education and the numberof doctorates earned has risen considerably. The graduate schools cover all themain areas of research. Together they form a network ranging from units con-centrated in a single faculty or locality to nation-wide establishments combiningthe resources of several faculties. In 2004, half of the 20+ graduate schools hadICT concentrations (Exhibit 4-1).


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Exhibit 4-1 Graduate Schools: ICT Concentrations

Graduate School in Electronics,Telecommunications and Automation,GETA [Helsinki and Tampere Universitiesof Technology, Universities of Oulu andTurku]

Graduate School in Computing andMathematical Sciences (COMAS)[Jyväskylä

Graduate School in Computing andMathematical Sciences]

Graduate School in User-CenteredInformation Technology (UCIT) [Uni-versity of Tampere, Tampere Universityof Technology, VTT Technical ResearchCenter of Finland, Nokia Mobile Phones]

Helsinki Graduate School in ComputerScience and Engineering (HeCSE)[Helsinki University of Technology,University of Helsinki]

Capital Resources

Since the beginning of the 1980s, the liberalization of Finnish capital markets hasreshaped the institutional environment of corporate funding. Through the invest-ment economy, domestic banks played the primary role as lenders and throughboards. In the early 1990s, Anglo-Saxon models of corporate finance and gover-nance arrived in Finland. The transition from investment economy to innovationeconomy coincided with the shift from patient domestic capital to fluid internatio-nal capital. As the significance of the stock market grew, the role of Finnish bankswas reduced. In 1985, domestic banks accounted for 92% of the turnover on theHelsinki Stock Exchange (HSE); by 1995, they accounted for only 22%. Until1993, when laws restricting foreign ownership were abolished, Finland discoura-ged foreign direct investment. With the removal of the restrictions, foreign invest-ment has risen rapidly.42 By 2000, foreign holdings accounted for 74% of totalmarket capitalization of shares (OECD, 2002).

Infotech Oulu Graduate School[University of Oulu]Graduate School of Eastern FinlandInformation Technology [JoensuuUniversity, Kuopio University,Technology University of Lappeen-ranta]

Graduate School in ComputationalMethods of Information Technology(ComMIT) [Helsinki University ofTechnology, University of Helsinki,University of Jyväskylä]Tampere Graduate School inInformation Science and Engineering(TISE) [Technology University ofTampere, Tampere University]Turku Centre for Computer ScienceTUCS [Turku University, ÅboAkademi, Turku School of Economics]

42 The annual average of FDI between 1988 and 1993 amounted to only $472 million,versus an annual average of $3.4 billion between 1994 and 1999. Membership of the EUin 1995 and EMU in 1999 accelerated FDI developments.


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Capital Markets: The Helsinki Stock Exchange

Throughout most of the 20th century, a stock exchange operated in Helsinki.Operating policies and models remained unchanged until the 1980s. Followingfinancial deregulation, the stock exchange entered a new era. From 1987 to 1989,the Co-operative Helsinki Stock Exchange carried out a reform, which marked aturning-point for the development of securities trading and markets. During theeconomic slump of the 1990s, the stock exchange became ever-more aware ofthe tumultuous global transition period in stock markets; thereafter several me-asures were taken to rationalize market structures and to streamline operations.

Through most of the 1990s, the buoyant performance of the Helsinki StockExchange (HEX) was boosted by the national cluster strategy and the recovery ofthe Finnish economy. 43 Most important was the success of Nokia, whose shareprice rose 21,943% (!) between 1993 and 2000. During the same time, the HEXall-share index climbed 1,472%, and Finland came to own the most valuablestock market (EUR 318 billion) worldwide relative to its national output (241% of

Table 4-3 The Nokia Effect: Finnish Capital Markets and theHelsinki Stock Exchange (1990 - 2000)

Top 10 Companies by Market Capitalization

Company EUR Billion % of Total

Nokia 223 70.1Sonera 14.3 4.5Stora Enso 11.7 3.7

UPM-Kymmene 9.5 3.0Sampo-Leonia 6.0 1.9Nordea 4.4 1.4Fortum 3.7 1.2Elisa Comm. 2.9 0.9Tietoenator 2.5 0.8Sanoma-WSOY 2.1 0.6

Total 280.1 88.1

Market Cap, Listed Companies, and Equities Trading Market Value of Capitali- Listed Equities zation Companies Trading

Year EUR Billion # EUR Billion

1990 13.9 2.6 771991 9.9 1.1 651992 10.8 1.7 631993 23.0 7.6 581994 30.5 11.5 651995 32.2 13.9 731996 47.9 15.9 711997 65.5 31.3 801998 131.9 53.3 1311999 346.0 104.0 1502000 318.4 227.0 158

43 In November of 1998, the Helsinki Exchanges announced a strategic plan for establish-ing the globally competitive Marketplace Helsinki, which is based on an independent


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stock market in 2003. Even though Nokia is not identical with the Finnish ICTcluster, the Finnish market, along with foreign ownership (90 percent of Nokia)remains highly vulnerable to Nokia’s performance.

Venture Capital and New Business Formation

Before the 1990s, regional funds rather than venture capital served as the histo-rical drivers of the investment-driven economy. With the launch of Start Fund ofKera Oy (1990), the public sector sought to stimulate the nascent Finnish ventu-re capital industry. The growth of the Finnish private equity and venture capitalmarket began in the latter half of the 1990s. Today, the private sector accountsfor most of the market. The public sector focuses on seed financing and turna-rounds. Concurrently, the Finnish private equity market is growing more interna-tional. The Finnish Venture Capital Association has 50 private equity houses andventure capitalists, as well as 64 associate members.

The electronics industry has been one of the most popular targets in the VCand development company activities. Two pivotal events—the success of Nokiaand government policies to support venture capital—have driven venture capitaland the expansion of entrepreneurship in Finland. Many elements have workedagainst both, including the Nordic egalitarian values, technology orientationover managerial and marketing capabilities, a highly homogeneous populationbase, and a preference for consensus management.

After the mid-1990s, the Finnish ICT cluster witnessed a rapid emergence ofventure capital, which created new opportunities for ICT startups. Some 54 per-cent of the VC investment funds targeted high-tech enterprises. In terms of VCinvestments, 60 percent of the firms that received VC funding were high-techenterprises. However, only 5 percent of Internet-driven enterprises received VCinvestment funds. Start-ups became more ambitious with potential of successfulinternational launch. In Finland, high-tech entrepreneurship and start-ups haveyet to achieve prominence in the high-tech industry. Relatively few Finnish start-ups have reached a global market position. In 2002, Finnish total investments byindustrial sectors amounted to EUR 361 million. Of these, ICT and electronicsaccounted for EUR 61 million and EUR 50 million, respectively. In regional terms,Southern Finland accounted for almost half of total investments (47%), versusWestern Finland (21%) and other countries (23%) (Figure 4-5).

national marketplace and international co-operation. As part of this strategyimplementation, the Helsinki Exchanges and the Central Securities Depository mergedinto the new HEX Group (Helsinki Exchanges Group Plc). In the spring of 2001, thebusiness name of Helsinki Exchanges Group Plc changed to HEX Plc.


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Figure 4-5 VC Investments in Finland: By Industrial Sectors andRegional Distribution (2002)

4.4 Demand Conditions

For quite some time now, Finnish population development has been most af-fected by internal migration. Population growth generally converges in the sub-regional units along the main and coastal railway lines from Helsinki. Because ofNokia’s strategic decisions, the ICT cluster’s key components tend to be univer-sity towns, which are also among the sub-regional units where population growthtakes place.44The size and structure of the population shape demand conditions.Like other Nordic countries, Finland is witnessing aging population demo-graphics (OECD 2003). Unlike its Nordic counterparts, however, it is also highlydependent on ICT growth and will have to cope with its gradual decline (OECD2002). Recently, Finland’s medium-term growth performance has been amongthe best in the OECD. To maintain its position, it will have to address these andother major challenges.

Demand conditions require Finnish ICT firms to compete at the edge of theproductivity frontier, typically via differentiation or innovation. Because of thesmall scale of the home base, both strategies must be developed not only for thedomestic market, but for worldwide purposes. With globalization, the quality oflocal demand often matters more than its size. A small demographic base is notnecessarily an obstacle to world-class R&D or superior differentiation. As cluster


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research has demonstrated, market conditions do require (1) sophisticated anddemanding local customers (2) customer needs that anticipate those elsewhere,and (3) unusual local demand in specialized segments that can be served global-ly (Porter 1998a, 1998b). These demand conditions are reflected in the Finnishpublic sector as well as business and consumer markets.

Public Sector

The role of the public sector has been multifaceted and strategic in the FinnishICT cluster. The development of radio technology began in the early 1960s,when Nokia initiated digital R&D and the Finnish Army ordered a prototype for asmall radio telephone from Nokia and two other private companies. As the in-dustry adapted radio telephones to civilian markets in the late 1960s, the firstmobile phone system was granted to the PT and Nordic mobile cooperation(NMT) took off. These indirect roles of the government as an “enlightened pio-neer customer” were successful. On the other hand, direct efforts to influencethe shape and direction of the telecom cluster were unsuccessful, (the 1950seffort to socialize Finnish telecommunications) or worse, resulted in political fias-cos. Such attempts included the socialization of Finnish telecommunications inthe 1950s and (the 1970s effort to nationalize Finnish electronics and biotechno-logy in the 1970s.

Through the 1970s and 1980s, the Finnish industrial policy emulated theexample of Japan and its famous MITI, whose policies were often associated withthe success of Japanese nations. Today, however, the dual characteristics of theJapanese economy and industry (global and competitive versus domestic and

uncompetitive) are more visible (Porter 1990, Porter et al. 2000). As a majorbuyer of telecom equipment and services, Finnish government has stimulatedthe expansion of mobile communications, just as it has operated through privati-zation, liberalization, and deregulation. Through the national innovation system,public policies continue to influence the four central cluster determinants. Newchallenges emerged in the mid-1990s, when the liberalization of the telecommarket was completed. At this point, the Finns were deregulating faster than theEU, which now influences the regulatory regimes. However, industry globalizationwas rapidly undoing the drivers of Finnish ICT success. Finally, the slow privati-zation of the national PT constrained Sonera´s bold ‘dual-track’ strategy at theend of the 1990s.

Business Markets

From the genesis of the Finnish PT´s R&D to the national R&D investments andtelecom deregulation, it was the public sector that steered the shape of the tele-


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com cluster. Since Nokia´s consolidation of the Finnish electronics business, thecompany´s strategy has been a guiding light of the ICT cluster, along with thenational R&D and cluster policies. These developments have often resulted insophisticated firm capabilities. These capabilities, however, have not resulted inas many successful commercial applications as anticipated. The ICT firms maybe sophisticated and demanding as customers; they may also have needs thatantcipate those elsewhere. But relatively few have managed to create pockets ofdemand that can be served globally. This chasm between technological capabi-lities and commercial performance, most typical to recent “born globals,” reflectsthe national innovation system. Most systems and processes have been gearedtoward sophisticated technology capabilitis - but not necessarily toward commer-cial success.

Consumer Markets

Through the late 1990s – roughly the peak years of Nokia’s market capitalization– Finland was the leader in mobile penetration. Demand for analog services hasbeen vanishing since the introduction of digital networks (Figure 4-6). In 2000,analog networks were closed down to release frequencies for digital services. Bythe mid-1990s, the threat of increasing competition, as well as the decline oftelecom prices in mobile and international calls, made Finnish telecom servicesthe least expensive in OECD comparisons. As cheaper portables replaced autophones, low pricing drove the breakthrough of mobile communications in Fin-land.

Since 1998, mobile subscribers have outnumbered their wired counterparts.By the end of the 1990s, the global wireless market for handsets was rapidlyexpanding, while the composition of sales was changing. After subscribers hadtheir first phone, the vendors developed an upgrade market, then a third one formultiple handset ownership, and a fourth one for replacements. Developments inthe Finnish ICT cluster foreshadowed those in the worldwide markets. A milesto-ne was passed in 1998, when the number of replacements exceeded that of newsales (Steinbock 2003d). These trends, however, were highly concentrated. InFinland, sophisticated and demanding customers are located primarily in themain coastal cities and urban locations, which also serve as Nokia’s R&D con-centrations and central arenas for capability-building in the national innovationsystem. The transition to digital cellular in the early 1990s and studies of mobileand PC usage at the eve of the 3G transition reflect these cluster characteris-tics.

With increasing globalization and outsourcing, and the convergence of theInternet and mobility, 99 percent of Nokia’s revenues originate from the foreignmarkets. In the 1990s, the rapid proliferation of GSM phones in Finland as well as


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the fast adoption of SMS in the youth segments demonstrated the benefits of apioneer market. However, Finland has only five million people, whereas in Chinasome five million new mobile subscibers are created monthly. As the markets areglobalizing, big is beautiful again and the world´s most attractive markets tend tobe increasingly multicultural.

Eager to create and renew technology markets, Nokia’s strategic market ma-nagement uses frameworks geared to speed up the transition from the earlyniche markets to the later mass markets. With traditional differentiators in Wes-tern Europe, new innovators in the United States and low-cost players in Asia-Pacific, the industry rivalry is increasingly about fast-cycle high-volume competi-tion. In this game, the early-adopters in multiple markets –the most advancedcountry markets in the Triad Plus regions (the leading large European nations,the United States, Japan, and China) – serve collectively as sophisticated anddemanding local customers whose needs anticipate those elsewhere. The glo-bal rivalry leaves Finnish players specialized segments, but these, too, can beserved worldwide.

Despite the great advances of Finnish technology, there is a disconnect at theheart of Finnish ICT policies. Bold centralized visions are drawn at the nationallevel, whereas economic and societal linkages have not been integrated as con-sistently at regional or local levels (OECD, 2002). Even more important, termssuch as “Finnish competitiveness” mask the fact that the ICT cluster has emer-ged and evolved around Nokia. As globalization now shapes the industry value

Analog and Digital Subscribers (1980-99)

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Figure 4-6 Analog and Digital Subscriptions (1980-99)


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chain, it results in the reconfiguration of Nokia’s value chain. These changes, inturn, are bound to influence the ICT cluster in Finland. Only when this conse-quence is recognized can appropriate policies and strategies be formulated.

Government Policy

After the mid-1980s, the Finns chose not to participate in the Competitive Advan-tage of Nations (CAON) research program. The momentum toward change acce-lerated dramatically with the collapse of the Soviet Union, Finland’s eastern tradeand the recession in the early 1990s, when a national sense of urgency enabledpolicy designers to experiment with new tools and instruments (Steinbock 1998,particularly Chapters 4-5). Between 1992 and 1996, Finland’s leading corporateCEOs, public authorities, and research organizations embraced a Finnish versi-on of the CAON program, which resulted in a quasi-national research initiative.The cluster program in Finland was coordinated by ETLA in the early 1990s.These studies were used by the Ministry of Trade and Industry in preparing newpolicy guidelines, as outlined in the National Industrial Strategy (Finland’s MTI,1993), and were later recorded in Advantage Finland (Hermesniemi et al., 1996,see also Rouvinen & Ylä-Anttila, 1999). Even belatedly, Porter’s book greatlyinfluenced the transition from the public sector-driven “traditional industrial poli-cy” to more market-driven “national industrial strategy” (Steinbock, 1998).

Subsequently, clusters have been widely used as conceptual tools in policydesign by national (and more recently, regional) institutions and organizations.At the same time, cluster thinking has contributed to a dialogue between thegovernment, public sector, and private sector, by providing a common language.The momentum of the movement toward a market-driven national strategy slo-wed in the mid-1990s, after the economy jumpstarted (Porter 1998c). This resultwas both understandable and problematic. The rejuvenation of the economyand accelerating economic growth evolved at the expense of structural unemplo-yment. In the long run, this policy remains ridden by an underlying contradictionbetween highly centralized incomes policies and the pressure toward highly de-centralized job markets. The former are driven by domestic policies; the latter byglobalization.44 In the past, regulatory regimes shaped directly the ICT cluster.

44 A polarized political discourse may have neglected the available range policyalternatives, which stress the compatibility of efforts at economic and growth and socialcohesion. As OECD studies have demonstrated, traditional territorial policies,concerned with the equitable geographical distribution of resources, are not anappropriate answer to the new conditions engendered by globalization. Compare OECD(2001).


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With deregulation, this function has been transferred to competition policy aut-horities.

Deregulation. Starting in the early 1980s, Finland was among the first-mo-vers in telecom deregulation (compare Table 4-3). The shifts were codified in theActs of 1987 and 1997. The former Act reflected the quest for pioneer advanta-ges, whereas the latter represented a re-regulation of sorts - efforts to “harmoni-ze” Finnish regulatory systems with the EU directives and reforms. In 2000, themarket capitalization of Sonera was estimated at $50 billion. With the marketdownturn, this figure fell to $3 billion in 2002. At a critical juncture, Sonera’s flexi-bility was constrained by policy (delayed privatization) and strategy (participati-on in the overpriced 3G license auctions). Without a potential merger partner,$47 billion in market capitalization simply dissipated. With 3G wireless networks,Finland was the first country to allocate licenses for 3G wireless networks. Theselicenses were granted free of charge to key players. The strong national techno-logy orientation may have contributed to the birth pains of the 3G era. Like mobi-le subscribers in other advanced OECD nations, the Finnish consumers are inc-reasingly price-conscious. Mobile markets are no longer driven by new technolo-gies, but by new value-added services.

Educational Policy

Traditionally, the long-term objectives of Finnish education policy have been toraise the general standard of education and to promote educational equality.Efforts have been made to provide all population groups and regions of thecountry with equal educational opportunities. Increasing overall flexibility andopportunities for individual choice are important goals. Internationalization hasalso emerged as a key objective. The education system consists of comprehen-sive school, post-comprehensive general and vocational education, higher edu-cation, and adult education. The government’s objective has been to streamlinethe system and develop it in accordance with the principle of lifelong learning andto make it internationally compatible. These goals were first formulated by KariKairamo, the architect of Nokia’s rapid growth strategy in the 1980s (Steinbock2001, particularly Chapter 2). The level of education in Finland has risen signifi-cantly since the 1960s, and the younger generation is now especially well-edu-cated.

Science Policy

Science policy is designed to ensure positive development in science and scho-larship, toraise the level of Finnish research, to ensure its comprehensiveness,


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and to enhance its social impact and international penetration. Since the 1990s,key priorities have been increasing research funding and maintaining the GDPshare of R&D at a top world level. Moreover, the science policy has stepped upthe development of centers of excellence; promoted national, European and in-ternational networking in research; and supported research in fields relevant toknowledge-intensive industries and services, including the ICT sector. Sciencepolicy is the responsibility of the Ministry of Education. The most important rese-arch financing organization is the Academy of Finland. Publicly funded researchis conducted mostly in universities and research institutes.

Technology Policy

Finnish technology policy is designed to strengthen the competitiveness oftechnology-based enterprises. Technological progress is used to create newbusiness opportunities and promote the growth of existing business. Technologypolicy is considered a central component in industrial policy. Technology policy isthe responsibility of agencies within the Ministry of Trade and Industry. The mostimportant organization financing technological R&D is the National TechnologyAgency (Tekes).

Historically, R&D expenditure grew steadily after the creation of the NationalTechnology Agency in 1983, and rapidly during the 1990s, primarily because ofan increase in business enterprise. Between 1991 and 2003, the proportion ofbusiness enterprise R&D expenditure climbed from 57 percent to 70 percent,peaking at 71 percent in 2001. In part, these developments reflect the govern-ment’s 1996 decision to systematically increase R&D funding.45 This decisionwas made to counter the substantial downsizing of general public expenditurethroughout the 1990s. Moreover, specific attention was attached to the cross-sectoral diffusion of knowledge. Accordingly, a share of these funds was directedto sectoral ministries’ cluster programs. Concurrently, the R&D expenditure inFinland climbed from EUR 1.7 billion (2.04 percent of GDP) to EUR 4.9 billion(3.43 percent of GDP). The relative proportion was one of the highest in theworld, right behind that of Israel and Sweden. The rapid increase has been main-ly due to the electronics industries, particularly the ICT cluster and Nokia, whoseinvestments in R&D increased to EUR 3,052 million in 2002, representing 10.2percent of net sales.

45 According to the decision, a part of the proceeds from privatization was earmarked forpublic R&D funding. The target for years 2001-2004 was to increase the funding with theGDP growth rate. The share of public R&D funding was stipulated at 40 per-cent, butgiven intense growth in private R&D investment, the share has declined to 30 percent.


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Competition Policy

According to the received wisdom, “the regulatory approach in telecommunica-tions policy bases on pro-competitive policy, light handed regulation and techno-logy neutral competition. The market is subject to general competition and con-sumer protection legislation. The telecommunications authorities pursue mini-mum interference policy, intruding mainly in cases of inadequate competition.The approach is less interventionist than in many other OECD countries. Somemandatory EU requirements have been enforced reluctantly in Finland, regar-ded as regressive to the liberal market functioning (Paija 2001).” Historically, thepro-competitive policy is not the result of competition policy initiatives, but ref-lects the liberal politico-economic structure of the czarist era. Some of those 19thcentury adaptations foreshadowed distinctive modern reforms. As the OECD(2003) evaluators note,

Finland was one of the first to liberalize its national infrastructure monopo-lies at the end of the 20th century, but that step was facilitated by a hun-dred-year history of competition in those industries. In telecoms, Finlandhad deliberately encouraged development of a non-integrated industryfrom the outset, in part to make it a less attractive target for a Russiantakeover, so that by the 1930s Finland had 800 local phone companies.

The current pro-competitive policy reflects a history of competitive vendorsand local telecommunications competition, the parameters of Nordic mobilecooperation, as well as early deregulation in the 1980s. In fact, there were nocompetition policy authorities in Finland until 1988. Finland debated the shape ofits competition policy for more than 30 years, before making it a centerpiece ofwide-ranging economic reforms in the late 1980s. Price controls, which had beenthe principal means of dealing with marketplace abuses, remained in place until1988. High concentration in some sectors was to be expected, given Finland’ssmall size and isolation from other markets. Cartels were tolerated, in part becau-se of uncertainty about what it would mean to eliminate them.46 Founded in 1988,the Finnish Competition Authority operates under the Ministry of Trade and In-dustry. The FCA is responsible for competition regulation in Finland. Its task is toenhance the efficiency of the economy by promoting competition. It takes measu-res to abolish competition restrictions and it implements merger control. The FCAinvestigates competition restrictions both on its own initiative and on the basis ofcomplaints received. Only since the 1980s has Finland followed an economics-based competition policy, as part of a general shift from collective corporatism toa more individualist market order.

46 From 1958 to 1998, Finland’s competition statute was revised 6 times. Despite effortsto make it stronger, the changes in the law often lagged behind actual applied policychanges.


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Communications Policy

Because the Finnish communication policy took an early start liberalizing its tele-communications sector in the 1980s, prices in most segments of the industry areamong the lowest in OECD countries. One primary objective of the Finnish com-munications policy is to promote the rapid diffusion of new ICT-technologies forInformation Society services throughout the country. The cornerstones of thispolicy are the following:

- Further market liberalization- Prevent the formation of new bottlenecks- Minimize sector-specific-legislation, through general competition and

consumer protection legislation- Maintain technological neutrality47

- Build users’ trust in e-commerce48

According to Finnish authorities, state intervention, including taxation andsubsidies, interferes with sound competition among emerging infrastructures.Technological neutrality has become increasingly important in the era of conver-gence. Traditionally, the IT-sector has not been regulated in the same way as thetelecom sector. The convergence of ICT systems has obliterated the divisionbetween “IT” and “communication” from the standpoint of regulation and techno-logy.

In line with the liberal policy, Finland has granted some countries 3G networklicenses free of charges in comparative tendering, to support free distribution ofnew technology. By the mandate of the Parliament, the government decided towithdraw from the telecom business. The privatization of Sonera, however, tookyears, in contrast to that of British Telecommunications.

Finland has only 500 larger enterprises but more than 200,000 SMEs. Thesmall SMEs face the greatest difficulties in taking advantage of ICT-opportunities

47 Technological neutrality includes equal terms and conditions in legislation forcompetition among different service channels (e.g. different broadcasting and telecomnetworks); light licensing policy (comparative bidding, no license fees, no extra burdensfor investors, involves only scarce resources, such as mobile telephony and terrestrialdigital TV networks); no public subsidies for any single network infrastructures (e.g.broadband networks) or users terminal equipment; and equal basis for light regulationacross the IT and communication parts of ICT infrastructures.48 Building users’ trust in e-commerce includes legislative framework on e-commerce,digital signatures and Information Society services; appropriate data security andcertification policy and legislation; and application of basic democratic rights of citizensin the regulation of electronic environments (e.g. freedom of speech, privacy, andconfidentiality).


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in business. As a result, these firms are the focus of Finnish Information Societypolicy and have been surveyed repeatedly on issues involving the Internet andecommerce. The Ministry of Transport and Communications is responsible forthe general policy on COMSEC – data security in digital communications net-works. The Finnish Communications Regulatory Authority (Ficora) is involved inthe supervision, promotion, technical regulation, and inspection of data securityand data protection issues.

Accordingly, the Finnish authorities believe that users’ trust, combined withhighly competitive ICT-markets and strong R&D policy, most efficiently promotediffusion of new competitive ICT-technologies. Therefore, these policies servethe main target of the government - the long-term interest of users, industry, andsociety in the Information Society Development.


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5 The Discontents of Innovation

Before the technology downturn, the economic prospects of the Finnish ICT clus-ter were often exaggerated. After the burst of the bubble, the sustaining charac-teristics of the ICT cluster – productivity, innovation, new business formation –have demonstrated expected weaknesses, based on the dual reliance (focus onmobile communications, role of Nokia). Except for Nokia, many ICT firms rely ontechnology pioneership, which is no assurance of commercial success. Theseissues originate from the Cold War and the relatively late participation in theworldwide technology sector, which is led by U.S.-based firms. Today, the histori-cal depth of these problems continues to be downplayed, but the problem hasbeen identified. Crafting and implementing new and appropriate strategic andpolicy guidelines will take years. There is no “quick fix,” but basic lessons count:

- public and private partnerships to boost innovation,- stable macroeconomic policies,- focus on attractive business environment and sophisticated company

operations,- rapid and extensive internationalization.

In order to appropriately assess the Finnish ICT cluster, it is vital to under-stand the role of Nokia in it, as well as the dynamics inherent between the two.This cluster grew around Nokia; it is sustained by Nokia; it evolves with Nokia.Today, it is the capability-building that defines the Finnish innovation system. Yet,it is not what ultimately accounts for competitiveness. Rather, the firms, throughtheir strategies, succeed or fail in industry rivalry. Since the late 1990s, the Fin-nish ICT cluster, led by Nokia, has found itself in entirely new competitive circum-stances. Even as the country is increasingly engaged in European integration,the ICT firms compete in industry segments, which are now challenged by theU.S.-based IT giants and whose growth markets are located in Asia.

Advantages and Disadvantages of Pioneership

In the fall of 2000, the Council of the Economic Advisers of the Clinton Administra-tion released a report on the “Economic Impact of Third-Generation WirelessTechnology” (CEA, 2000). The CEA argued that 3G wireless technology provi-


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ded high-speed mobile access to the Internet and other communications net-works, offering significant benefits to consumers and telecommunications provi-ders, and the U.S. economy: “It is urgent that the United States follow other ad-vanced countries in making adequate spectrum available for 3G applications.”According to the CEA (2000), strong anecdotal evidence suggested the impor-tance of location in the early-stages of high technology industries, as exemplifiedby Silicon Valley and Finland:

… in Finland—which allocated its 3G spectrum in March 1999—a vibrantcluster of startups developing commercial applications for 3G and existingdigital wireless technologies has emerged. Nearly 3,000 companies in Finland are involved in telecommunications and other IT industries, includingwork on wireless technologies and applications ranging from bill-paymentsystems to wireless portals and entertainment. Recently, major companiessuch as Hewlett-Packard have chosen to base their wireless applicationsdevelopment programs there, where wireless penetration is the highestamong the OECD economies.

With the impending end of the Clinton-Gore era, the report had been written in ahurry.49 It contained an appendix on the Finnish wireless cluster, based on officialFinnish data and journalistic sources (Figure 5-1a). In reality, major U.S. compa-nies have been in Finland for decades, even if some have launched small wire-less applications development programs more recently. Unfortunately, theseprograms are relatively small and can easily be removed, as well. However, theFinnish wireless cluster was evaluated in light of very recent developments, wit-hout dynamic longitude. Observers emphasized wireless application protocol(WAP), the costly flop of the late 1990s (Steinbock 2002; Funk 2001). In the lightof dynamic innovation waves, the Finnish wireless cluster looks quite different(Figure 5-1b). Pioneership does not necessarily translate to strategic advanta-ges. However, the Finnish ICT cluster –and the Finnish innovation system in ge-neral – depends on a strong technology base, at the expense of deficiencies inmanagement and marketing capabilities and international business experience.It is not that the (wireless) “future is Finnish” (Newsweek 2001); it is that Finnishhigh-tech strategies share many of the inherent strengths and weaknesses ofJapanese global strategies, which they initially emulated.

An improving business environment gives rise to clusters, which tend to beconcentrated in a particular region within a larger nation (Silicon Valley in theUnited States), a small country (ICT cluster in Finland), or even in a single city

49 Based on the author’s communication (2000-2001) with the CEA researchers whowere involved in writing the report.


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borough (new media in Manhattan). Clusters affect competitiveness in threebroad ways: by increasing the productivity of constituent firms or industries; byincreasing the capacity for innovation and, thereby, for productivity growth; andby stimulating new business formation that supports innovation and expands thecluster.

ICT Cluster and Productivity

From the mid-1970s to the end of the 1990s, multi-factor productivity has domi-nated Finnish growth (Jalava 2002). The capital term contributed significantlyless to output growth in the 1990s than it had previously. Thus, growth in Finlandin the 1990s relied less on embodied technical change per se, and more on MFP.The only exception to this was the extensive contribution of ICT capital services

Figure 5-1 Finnish Wireless Cluster: Before and After theShakeout

a) Finnish Wireless Cluster:Hype and Expectations

- World’s most sophisticated consumers- 70% penetration of mobile phones (20% of households have aband- oned wireline phones)- First country to allocate licenses for 3G wireless networks (3 competitive groups)- Heavy usage of short message services- Finland is a test market for WAP applications

Context for FirmStrategy and

Rivalry

FactorConditions

DemandConditions

- Substantial public investmentin telecom-related R&D, with afocus on wireless technology- Significant local venture capitalfor mobile applications- Finland is becoming aninternational center for WAPdevelopment (e.g., HewlettPackard, Siemens)

- Finland is home to Nokia, theworld’s most competitive handsetcompany- Approximately 3,000 Finnishfirms in telecom and IT relatedproducts and services


SOURCE: CEA (2000)

- History of competition in telecomservices throughout the 20th century- Early to deregulate in telecom relatedindustries- More than 100 local operators- Active local rivalry in wirelesscommunications


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b) Finnish Wireless Cluster: After the Shakeout - Highly sophisticated consumers

- Over 80% penetration of mobilephones (20% of households haveabandoned wireline phones)- First country to allocate licensesfor 3G wireless networks (3competitive groups), but delays intakeoff- Heavy usage of short messageservices- Finland is a test market for newmobile applications, but many,including WAP, have failed WAP

Context for FirmStrategy andRivalry

FactorConditions

- History of public consolidation intelecom services since the 1930s- Early to deregulate in telecomrelated industries, but delayedprivatization

- Finland is home to Nokia, the world’smost competitive handset company,which is now offshoring some HQ andunit functions to the U.S.- Leading contractors are offshoringactivities to core markets (e.g., China)- More than 100 local operators, butonly 2-3 primary players (Sonera,Elisa, Finnet)- Active consolidation in wirelesscommunications

- Approximately 3,000 Finnish firmsin telecom and IT-related productsand services, but increasinglypolarized into large and small players- Deficiencies in new businessformation

- Substantial public investmentin telecom-related R&D, with afocus on wireless technology- Significant local venturecapital for mobile applications- Failure of WAP tarnishedFinland’s clout as an inter-national development center

DemandConditions


(Colecchia and Schreyer, 2002, Jalava and Pohjola, 2002).50 According to recentresearch, the contribution of ICT to output growth in the market sector increasedfrom 0.3 percentage points in the early 1990s to 0.7 points in the late 1990s.Moreover, the fast growth of multi-factor productivity in the ICT producing in-dustries has contributed at least as much as the use of ICT. Despite the criticalrole of ICT in the recovery from the severe recession in the early 1990s, therewas no acceleration in the trend rate of labor productivity.

As Jalava and Pohjola (2002) have argued, “In fact, the growth performanceof the Finnish economy has not been very outstanding when considered over thewhole decade of the 1990s. The unemployment rate is now around 8 per cent,and the economy is still returning to its trend growth path. The New Economy is

SOURCE: Steinbock (2001, 2002)

50 MFP can also be expressed as the geometric average od labor and capital productivi-ty. Because labor productivity growth slowed down in the late 1990´s, capital efficiency in-creased significantly, most likely as a result of R&D and economic innovations


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yet to demonstrate its strength.” Concurrently, they point to the real advantageof the U.S. economy, which has enabled it to benefit from the diffusion of ICT.“The productivity gains [in the United States] not only reflect increased invest-ment in ICT, but also complementary innovations in business organization andstrategy. This is what the New Economy is all about.”

The Finnish ICT cluster, thus, suffers from a paradoxical dilemma. With themobilization of the U.S.-led ICT sector, the Finnish ICT cluster, particularly wire-less segments, have contributed to the rapid expansion of the ICT sector. Howe-ver – except for Nokia – deficiencies in complementary innovations in businessorganization and strategy retard the productivity of the constituent firms in thevery same cluster. Ultimately, these issues go back to the Cold War era, margi-nalization from the Marshall Plan, U.S. productivity transfer to Western Europe,and the consequent slow diffusion of American management and marketing inFinland (Steinbock 2003).

ICT Cluster and Innovation

In addition to increases in productivity, clusters tend to increase the capacity forinnovation and thus for productivity growth. Opportunities for innovation oftencan be perceived more easily within clusters, and the assets, skills, and capitalare more available to pursue them. With innovation, the strong technologyorientation of the Finnish innovation system has served as a necessary, but notsufficient, condition of productivity. Innovation has been conceptualized astechnology development, whereas management and marketing developmenthave played a secondary role. For most practical purpose, the strong technolo-gy orientation has boosted exclusive reliance on first-mover advantages, whichresult from pioneer strategies.

Since the late 1960s, Finnish public policies have increasingly supportedtechnology investments, which in turn rely on pioneer strategies and early-adopters. More recently, these efforts have been reinforced by national “infor-mation society” projects, which have presented Finland as a model for othernations. These accounts have typically underscored customer needs that anti-cipate those elsewhere, thus focusing on the role of first-mover advantages andearly-adopter policies (Castells-Himanen, 2001). However, these approachesoffer little solid business evidence to back up the theory. Similarly, they neglectthe fact that all successful first-mover advantages may easily turn into first-mo-ver disadvantages (Table 5-1).

In mobile communications, the earliest innovators have often acquired po-werful first-mover advantages. To compete with these first movers, late-movershave had to achieve significant cost advantages or differentiation, or both, inorder to secure a foothold (Chandler and Hikino 1990, Chapter 2). In the past


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(1G and early 2G eras), Finnish strategies and policies facilitated the rise of newmarkets, which were supply-driven, domestic, or at most regional. Concurrently,the substantial role of the public sector – through trade and foreign investmentcoupled with technology, competition, and regulatory policies – reflects input-driven success. This role was a powerful catalyst to the emergence of the FinnishICT cluster, prior to Nokia’s global focus strategy and expansion. Since the early1990s, Nokia’s success has reflected the role of firm-level strategy. With the 3Gtransition, public-sector policies have been revised to better respond to market-driven developments. Nokia’s strategic posture has reflected efforts to deter cur-rent competition, including the traditional European-based vendor rivals, theU.S.-based and IT-driven “Wintel” attack, and the low-cost rivals in Asia-Pacific.Meanwhile, other major Finnish ICT players have struggled to stay abreast thecompetitive developments.

Table 5-1 Innovator’s Dilemma and Finnish ICT: How First-MoverAdvantages May Turn into First-Mover Disadvantages

First-Mover Advantages

First country in the world to adopt GSMstandard

First country in the world to introduceATM (Asynchronous Transfer Mode) inhigh-speed Internet services

Nokia: the leading global mobileequipment vendor

Very low telecom/mobile pricing

Highest relative penetration in mobilecommunications

With Sweden, Denmark, and theNetherlands, relatively highest ICTindicators (PCs, e-mail use, Internetconnections, Internet hosts)

Economy and exports highlyspecialized in technology

Highest R&D expenditures: 3.3% ofGDP in 2000

First-Mover Disadvantages

3G is based on a single flexiblestandard; GSM no longer guaranteessustainable strategic advantages

Due to dynamic developments, ATMrepresents only one option among awide variety of high-speed alternatives

Value-added is moving from terminals tosoftware; replacement demand is rapidlyadding price pressures in terminals andthereby squeezing vendors like Nokia

Contributes to innovation, but homebase is too small to provide scale forstrategic advantages

Penetration contributes to innovation,but today usage and commercialsuccess is more important thanpenetration

While ICT indicators have been veryhigh internationally, they have not easilytranslated to innovation leadership orprofitable business models in the Inter-net and mobility

Great advantages turn to great dis-ad-vantages, if technology strategies fail orthe ICT cluster is not adequately diversi-fied

Extraordinary high R&D has not resultedin a more diversified ICT base, substan-tial IPOs, or profitable new businesses


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Until the end of the 1990s, pioneer strategies proliferated in mobile communi-cations. With the shakeout of the technology sector and industry consolidation,pioneering is no longer enough. The surviving players must be willing and able tocross the chasm - to move from small-scale niche segments to large-scale mar-kets. By the end of the 1990s, many Finnish pioneers in mobile communicationsfound themselves “stuck in the chasm” as a result of the 3G transition and in-dustry consolidation.

With the convergence and globalization of mobile and IT industries, it is vitalthat the Finnish ICT cluster policies and strategies do not focus only on the tech-no- logy and input side but also on strategic and market-driven developments.Similarly, first-mover advantages provide no strategic panacea. Sustainablestrategies require emphasis on sophisticated and demanding local customers inworld-wide terms; customer needs that anticipate those elsewhere worldwide;and unusual local demand in specialized segments that can be served globally.

Despite extensive capability building vis-à-vis the national innovation system,the Finnish ICT cluster suffers from a lack of motivation in entrepreneurship andnew business formation. In addition to the tax rates and social security system,the relatively low degree of new business formation stems from inherentconstraints of the Finnish innovation system. First, the national innovation sys-tem rests on the higher education system, which is increasingly driven by effortsat specialization and internationalization, yet is constrained by its owner, the sta-te. Second, in R&D, the public-sector Tekes, not the market-driven firms, oftenstructures development projects to promote commercialization. Third, in venturecapital, private players play an increasing role, but public risk capital, throughSitra, dominates early seed funding, and the degree of internationalization isrelatively low.51 In 1999, of all VC investments, only EUR 19 million were investedin start-up companies and EUR 15 million in seed stage companies. Of all seedinvestments, 84% were carried out by the Finnish National Fund for Researchand Development (Sitra).52 In the new de facto syndication, the private sectorventure capitalists adopt the market risk of a new firm, whereas the public sectortakes the technology risk. The arrangement is the reverse of the “Silicon Valley”model.53

51 Historically, the Finnish public sector has been the key financier of start-ups, vis-à-vissubsidies, soft loans and other instruments. Through the Ministry of Trade and Industry,Tekes and Finpro have facilitated Finnish start-ups for decades.52 According to Finnish observers, this lack of adequate seed financing is caused mostlyby market failure, or “the immaturity of the business angel activity as well as the privateequity market, where just a few investors are actively investing into seed-stagecompanies” (Ronkko, 2001). Critics point to government failure.53 Between 1995 and 2000, the smooth interplay of innovation, technology, and riskcapital accounted for the extraordinary success of the United States industry. Thissuccess depended on the availability, efficiency, and effectiveness of private sector early-seed funding. Neither the presence of early-seed funding nor the interplay of the keygrowth drivers, however, ensured sustainability (Steinbock, 2001).


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Israel and Finland each have a population of less than 10 million, a sophistica-ted technology infrastructure, and an S&T emphasis on engineering sciences. Incontrast to Finnish venture capital, the Israeli venture funds prefer to focus inearlier stages of development, fewer industries, and syndication and internatio-nal partners.54 The combination of global venture investors’ new willingness tolook to Northern Europe for additions to their portfolio and the increasing visibilityof the Finnish high-technology sector provide a substantial opportunity to createvalue through the rapid internationalization of early-stage technology-basedfirms. However, the international sources of capital must be accessed and leve-raged for firms at a very early stage of development.

When the wireless industry was primarily domestic and driven by the supply-side and technology development, pioneership often sufficed. Today, as the in-dustry is rapidly globalizing and is driven by the demand-side and marketingdevelopment, pioneership is no longer enough. Consequently, the ICT clusterhas not increased optimal capacity for innovation and, thus, for productivitygrowth.

ICT Cluster and New Business Formation

Clusters tend to enable new business formation that supports innovation andexpands the cluster. The local presence of experienced workers and access to allthe needed inputs and services, for instance, reduces entry barriers. Entrepre-neurship and new business formation are vital to sustain and renew the ICT clus-ter because the majority of the born globals are small ICT firms. The Finnishgovernment has made the promotion of entrepreneurship a top priority. In aneffort to raise awareness, it launched an “Entrepreneurship Initiative” in 2000,bringing together nine ministries and other interest groups to promote entrepre-neurship through various policy programs ranging from financial packages tohelp-lines and promotional courses. High tax rates and an extensive social secu-rity system, however, continue to hinder the overall level of new business creati-on.

54 Starting with only a couple venture capital firms in 1991, and less than $50 million inassets under management, the Israeli VC industry expanded to the point where over $550million of new investments were placed into young Israeli companies in 1998. The vastmajority were in high-tech. In 1997, Finnish venture capitalists only invested 13% as muchin high-technology industries as their Israeli counterparts ($51 million compared to $377million). Syndication – with multiple members and international venture capitalists – ismuch more a part of the Israeli venture capital culture than in Finland. (see Cardwell, 1999).


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According to the Global Entrepreneurship Monitor (GEM, 2001), the entrep-reneurial activity rate in Finland was 9.3 percent in 2001, just above the averageof all 29 GEM countries. The rate was lower than that for 2000; the fall in entrep-reneurial activity reflects the downturn of the markets and the technology sector,including the slowdown of Nokia’s growth. As in other Nordic countries, opportu-nity rather than necessity motivated the majority of entrepreneurs in Finland. Onthe other hand, investment by individuals in new start-up businesses was moreprevalent in Finland than in the other European GEM 2001 countries (Table 5-2). According to the GEM review, a lack of experienced entrepreneurial teamswas a key bottleneck for growth in the entrepreneurial sector in Finland. Further-more, because of a relatively small home market, technology start-ups in Finlandmust internationalize rapidly. This requires expertise and strong internationalnetworks, both of which are only evolving. In addition, strengthening theentrepreneurial culture remains a key challenge for the more peripheral Finnishregions. As several different municipalities and regions now compete for Europe-an Union and government funds, regional specialization may no longer protectfrom a regional divide. Finally, fostering an entrepreneurial mindset and cultureis a key challenge for the Finnish educational system at all levels.

* Total EntrepreneurialActivity TEA (*) % tryingto start or running anew business. TheTEA reflects bothopportunity-driven andnecessity-drivenentrepreneurship.

Table 5-2 Total Entrepreneurial Activity (TEA): 29 Countries, 2001

SOURCE: Global EntrepreneurshipMonitor (GEM)

0

2

4

6

8

10

12

14

16

18

20

Mex

ico

Aus

tralia

New

Zea

land

Kor

ea

Bra

zil

Irel

and

U.S

.A.

Hun

gary

Indi

a

Can

ada

Arg

entin

aIta

ly

Polan

d

GEM

200

1 A

vg

South

Afric

a

Finla

nd

Nor

way

Den

mar

k

Spain

Uni

ted

Kin

gdom

Franc

e

Portu

gal

Ger

man

y

Rus

sia

Swed

en

Net

herla

nds

Isra

el

Singa

pore

Japa

n

Bel

gium

SOURCE: GEM 2001


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From the end of the 1990s until the market downturn, rapid high-tech growthalso reflected rising unease in the Finnish society. By 2001, the InternationalMonetary Fund (2001) depicted Finland as a result of a “radical structural chan-ge,” in which the ICT sector served as the horsepower behind the economic reco-very and expansion. Only two years later, IMF saw Finnish growth and volatility asintertwined. Concurrently, the OECD (2002) made note of the deepening gapbetween the “old ways” of the society and the “new high-tech” of the economy. Inmedia, the unease was reflected in debates on perceived “Americanization,”stock options, and “Nokia millionaires.” On one hand, Nokia’s global successboosted Finnish pride and economic nationalism. On the other hand, many Finnsviewed the success in globalization as antithetical to Nordic egalitarianism.

Regionally, the “radical structural change” aggravated existing differencesbetween the growth centers and the more peripheral regions. Investment by indi-viduals in new start-up businesses, for instance, was more prevalent in Finlandthan in other European GEM countries.55 Located in Espoo, the “garden suburb”of Greater Helsinki, Nokia’s headquarters served as a prosperity magnet for the“Nokia millionaires,” 2,270 of whom resided in Helsinki (870 in Espoo).56 In 2001,Salo, the famed center of Nokia Mobile Phones, became the richest city in Fin-land with its 64 stock option millionaires and a per capita gross income of FIM212,000 (roughly EUR 36,000).

Institutional Capabilities and Firm Performance

Until recently, Finland’s Wireless Valley has been perceived as a great successstory and a model for imitation. Internationally, the rise of the ICT cluster, evolvingaround Nokia, seemed to happen “out of the blue.” In reality, research indicatesthat this seemingly sudden expansion actually reflects investment policies thatoriginate from the 1950s and 1960s. Similarly, Nokia’s dramatic growth in the1990s occurred only after some 15 years of losses by the electronics unit. Ne-vertheless, the contemporary success is undeniable and reflected in locali-

55 In 2001, 3.8% of Finnish working-age adults reported having invested funds in new businessesstarted by others during the past 3 years. This level of activity suggested an annual (bubble) capitalinflow of over FIM 2.3 billion provided by ‘micro’ angels, which was more than five times as muchas the total investment by the Finnish venture capital industry in early-stage businesses (GEM,2001).Typically, these investments also demonstrated substantial regional polarization.

56 Of note, the Nokia region, with a population of around 25,000 was home to nearly 170 Nokiamillionaires, whereas the neighboring Tampere had only twice as many, even though it was eighttimes larger. The shares had been bought by employees in directed issues in the 1970s and 1980s,at a time when Nokia was involved in forestry and paper, cable manufacturing, and tires & rubberboots, well before the rise of mobile handsets.


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the cluster success with service competition ignore the forces of consolidation,which reduced the number of effective rivals from more than 830 telcos to per-haps three or four, between the 1930s and 1950s. During the investment stage,the duopoly setup was the rule (competitive local telecommunications versuslong-distance monopoly). Preceded by Nordic mobile R&D, the innovation stagewitnessed early deregulation of telecom markets as well as severe delays in pri-vatization. Where Nokia thrived, Sonera failed. Although it was greatly supportedby public sector R&D, the evolution of the ICT cluster was not the result of farsigh-ted public policy. In fact, it followed failures of public policy. In the 1950s, Finnishcommunists and socialists attempted to socialize telecommunications. In the1970s, the center-left democratic front sought to nationalize the industry by cre-ating a telecom-biotech national champion. Both initiatives failed. As the publicsector withdrew, Nokia was allowed to consolidate the business.

In the 1980s, Kari Kairamo transformed a diversified Finnish firm into a Euro-pean technology conglomerate. In 1992, Jorma Ollila, along with the group exe-cutive board, divested all non-core properties and focused the company globallyon mobile communications. At the peak of the GSM era, the environment was stillregional. Globalization accelerated in the late 1990s, particularly with the rise ofthe Internet and the early 3G transition, or the twin drivers. In the Finnish ICTcluster, Nokia’s wireless capabilities defined the telecom, hardware, software,and embedded service markets. Similarly, Nokia represented most of the totalindustry sales and production and more than 90 percent of total R&D. Domesti-cally, Nokia’s R&D, production, and headquarter locations form the geographiccore of Finnish ICT activities. Internationally, its exports and FDI define the termsof internationalization for all other strategic groups, from contractors to softwarehouses and born globals.

Until the early years of the analog cellular, Nokia was primarily a domesticplayer. Along with Finnish innovation regimes, it created the ICT cluster. Throughmuch of the digital cellular era, Nokia internationalized very rapidly, but GSM wasa regional triumph. In the absence of widespread globalization, Nokia shaped theFinnish ICT cluster. With the early 3G transition, globalization drove the industryvalue chain. In the pre-cellular era, AT&T could still shape the course of the busi-ness. Today, no single firm can determine the industry direction. The evolution ofthe globalizing value chain is the function of the bargaining power of different

zation(employment and economics in the Finnish ICT sector) and globalization(production of ICT goods as well as ICT exports and imports). This success isprimarily about Nokia, and secondarily about Finnish competitiveness. It is Nokiathat made the cluster, not the cluster that made Nokia.

The Finnish ICT cluster is the result of three competitive stages. Local compe-tition, originally crafted by Russian authorities in the 19th century, co-evolved witha de facto long-distance monopoly in the factor-driven stage. Efforts to explain


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strategic groups (including contractors, vendors, operators, IT players), as wellas their capabilities in vertical coordination. Currently, industry rivalry is driven byEuropean-based mobile vendors, led by Nokia, and U.S.-based IT leaders, ledby Microsoft. The future of the Finnish ICT cluster depends on the outcome in thisglobal rivalry. Nokia can reinforce its strengths (reorganization) and boost itsweaknesses (relocation), but its bargaining power is limited.

In the Finnish ICT cluster, the bargaining power of non-Nokia firms, and that ofgovernment authorities, is minimal or insignificant. The delay of Sonera’s privati-zation, coupled with the failures of the senior management, has weakened therole of telecom service providers in Finland. Increasing efforts to boost the inno-vative capabilities of ICT firms is perhaps the only viable policy, but most of theseplayers are relatively small, new, and hampered by entrepreneurial constraints.Coupled with the lack of international experience and unfamiliarity with rapidgrowth, longer-term weaknesses in management and marketing, these ICT firmsare unlikely to generate new “mini-Nokias” or even “mini-Elqotec’s,” at least in theshort term. Major foreign ICT firms have had a longer presence in Finland, evenif their R&D investments are more recent and originate from the late 1990s. Butthese R&D operations are relatively small, and their future is a function of theglobal industry rivalry. Until the globalization impact, they co-evolved with Nokia,their most important customer. Nokia’s strategy was their strategy. Macroecono-mic stabilization benefited both in the early 1990s, as did the increasingly attrac-tive Finnish business environment. Meanwhile, these companies learned fromNokia’s rapid growth, expansion, and increasing sophistication. As Nokia globali-zed, they followed. But today, the Finnish ICT firms that co-evolved with Nokiaface entirely different challenges. They are on their own.


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What next? Finnish ICT Cluster and Globalization

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