Prime Minister Matti Vanhanen hopes Finland’s EU presidency will allow the technology-savvy nation to spearhead important changes in the way Europe approaches science and innovation.

In a changing world, Europe has to modernise, reform and adapt to seize the opportunities of globalisation. This is the only way to guarantee our prosperity in the face of competition from emerging economies such as China and India.

It is becoming increasingly evident that, in order to meet the new challenges, promoting innovation should be a key objective. Only through innovation we can accelerate productivity growth, as well as safeguard and boost employment in the face of ever stiffer competition.

Investment in knowledge and innovation is essential in combination with innovation-friendly markets. Increasing Europe’s competitiveness through innovation will therefore be one of the core priorities for the Finnish EU presidency during the second half of 2006.

So far Finland has succeeded in meeting the challenges of the new global competition and utilising opportunities in the expanding markets. The Finnish economy is very open, which means that the country strongly feels changes in the global economic environment. Therefore it is no surprise that many Finns have been very worried about the potential negative consequences of increased global competition. And, indeed, there have been many instances of plant closures, and cases of production being transferred to other countries, such as China.

Embracing globalisation

Nevertheless, our assessment is that globalisation provides us with many more opportunities than threats. Globalisation gives us all wider markets, cheaper imports, better chances for efficient division of labour and better diffusion of knowledge. But to reap the benefits of these new opportunities and to avoid negative consequences, our economies have to be agile, to adapt to new circumstances quickly. This requires constant innovation.

Finland has undergone a deep transformation that started in the early 1990s, and has now largely been completed. The Finnish economy landed in a deep economic crisis when the former Soviet Union collapsed and Finland lost its biggest export market. The traditional wood and paper industry – Finland’s most important source of income – had to deal with big losses and gross domestic product (GDP) per capita fell by almost 10%. Inflation increased enormously, as did unemployment, from 2% to 17% in two and a half years.

The structure of the Finnish economy has changed more profoundly than in any other Organisation for Economic Co-operation and Development (OECD) country in the same period. The focus of production shifted from low-growth branches to high-growth branches. Finnish industry rapidly became much more technology-intensive, and production highly specialised. Finland even developed into the most highly specialised information and communications technology (ICT) country in the world.

Industrial production and exports grew significantly faster that the rest of the economy, which became structurally more diverse. Weak businesses went under as profitability came under pressure from the recession and stiffer competition.

Galloping growth

Finland and perceptions of Finland have come a long way since the early 1990s. Nowadays, people throughout the world are reminded of Finland by the mobile phone they use. Our GDP has grown at more than 3.5% annually over the past 10 years, which includes the slowdown years after the burst of the ICT bubble.

The key elements in a good innovation system are good basic education and sufficient and well-targeted research and development (R&D) expenditure. But these are not enough. There must also be also be extensive networking between universities, research institutes, large as well as smaller companies, and not just within the country, but globally.

Of course there are other important factors. A stable macroeconomic environment is one of them. And we would like to think that a consensual approach to economic policy and structural reform is important too. Although reaching consensus is often painstaking and slow, it also makes difficult reforms acceptable and their implementation smoother.

Technical education

The Finnish education system provides a good foundation. Educational performance is generally good, notably so among youngsters. Compared with the rest of Europe, Finland still has many people with a sound technical background. This is an enormous asset for modernisation. Furthermore, R&D investment is relatively high in relation to the size of the economy. It accounted for 3.46% of GDP in 2005, with more than two-thirds of this coming from the corporate sector.

Drawing on this domestic experience, we want to take European innovation policies further and at the same time learn from others to develop our own policies. One important thing is to increase investment in knowledge in many different ways. We need more R&D. The European university system has to become more efficient, and we have to create globally competitive centres of excellence. More investment in high-quality education at all levels is crucial.

The European Institute of Technology is a useful addition and can provide value added on a European scale. We need to support a strong scientific base by providing highly qualified scientists and engineers in sufficient numbers. Student exchanges must be encouraged throughout Europe.

Open markets

Furthermore, an efficient, open internal market for goods, services, finance and people is indispensable in order to boost the commercialisation and the uptake of innovations. Also, access to innovation financing must be improved as the financial markets in Europe do not cater well enough to the needs of companies, particularly small and medium-sized enterprises.

A well-functioning intellectual property rights regime is essential to protect and reward investment in R&D and reduce the burden of red-tape on companies. In short, we need to move towards an innovation-friendly regulatory framework. All of this also requires more flexible and adaptable labour markets.

The recommendations contained in the report “Creating an Innovative Europe”, produced by former Finnish Prime Minister Esko Aho, help to shape our ideas. Mr Aho also chaired the group of experts on R&D appointed after the Hampton Court Summit in October last year.

To sum up, it is our intention to focus on creating a huge act of will and commitment from political, business and social leaders. This is what the Finnish presidency must do if it is to promote a new approach to innovation and propose new responses. Finland hopes that its presidency will mark an important change in the European approach to innovation, which above all needs a change in mentality. It is only by choosing this path that Europe will be able to deliver to future generations.

However, past achievements are no guarantee for future success. In Finland, we are already looking at strategies for the next phase. I hope that Finland will remain at the forefront of innovation policy. Finnish innovation policy is worth watching.


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