State-ownership, power and industrialisation

State-owned enterprises have played an important role in Finland's industrialisation. They were part of political conflicts about development, power and even language and class.

This text appeared originally on my old blog in 2023. I slightly edited it.

After I finished the book about Fortum’s history, I was intrigued and looked for more literature about the history of Finnish state-owned enterprises. My local library delivered as it almost always does and I found two books. Valtion yhtiöt by history professor Markku Kuisma and Niin siinä käy kun omistaa by Risto Ranki, a career bureaucrat in the former ministry of trade and industry, the predecessor of today’s ministry of economic affairs and labour (TEM). Kuisma’s book is that of a historian who maintains a distance to the topic and often expands his angle to include the broader political and economic circumstances, Ranki saw things from up close and was involved in historic decisions such as the privatisation of formerly state-owned enterprises in the 1990s and reveals what people were thinking inside the government machine. Kuisma tells the story by following four companies with occasional references to others while Ranki’s list is longer. Both are great books about a topic most people perhaps find boring. To me, however, it is endlessly fascinating. That I sit here today in one of the wealthiest countries in the world is also the result of a roster of state-owned enterprises and the daring, ambitious people who founded and led them.

Let’s get something out of the way first: socialism or communism or any other left idea feature very little in this story and usually only as getting the votes in parliament. This is not unimportant of course but not why these companies were brought into existence. Their story is one of power, of industrialisation, nationalism, national security, international relations and class and language. They represent an unusual form of entrepreneurship, a state-backed one, merged with managerialism but in service of the country instead of investors. Government-owned yes but government-run they were not. And as I will explain, they had more than just one purpose and that is why they almost all are creations of people on the right side of the political spectrum.

The story begins in the ruins of war-torn but still fighting Europe in 1918 and in the aftermath of the young independent nations’s bloody civil war. The Whites had successfully defeated the Reds with the help of Imperial Germany. In return for assistance the White government agreed to far-reaching trade concessions and even a German monarch. The brother-in-law of the last emperor Wilhelm II. was supposed to sit on the Finnish throne as Fredik Kaarle I. Finland almost became a German protectorate and this weak position would lead to the first major state-owned enterprises, Enso-Gutzeit and Tornator (today’s Stora Enso).

Enso-Gutzeit and Tornator were different from the ones that followed because they were nationalised and not set up from scratch. The political leaders of the early years were thoroughly economically liberal and floating in the orbit of the Fennomane bank KOP. It was them who bought these two companies against their political convictions. The major factor were the Germans and to a lesser extent other more developed economies that had an interest in Finland and its resources. Enso-Gutzeit and Tornator were the country’s largest private landowners whose portfolio included large swatches of pristine forest, very good stretches of rapids to exploit for power generation and other natural resources. The Germans had privileged access through the treaties they had signed with the Whites. Additionally, then and now, the fear of foreign exploitation of Finnish land and resources was a powerful current running through society that had important political consequences (an offshoot of this is today’s ongoing debate about Finland’s very low mining tax).

But the Germans were afraid that the Norwegian ownership of the two companies was a possible vector for British capital to get access to the land. So the Germans pressured the Finnish government to nationalise Enso-Gutzeit and Tornator. While the Finns told the Germans that they indeed did it to prevent a British takeover, they were actually afraid of a German takeover. Buying the two companies was a way to make sure German conglomerates couldn’t. After Germany had lost the war and descended into revolution and chaos, their influence waned and the Finnish state had freer hands.

But there was more to the nationalisation than just outmaneuvering the Germans. The early state-owned enterprises were tangled up in the language question as well. The Swedish moneyed elite still controlled most of Finland’s large conglomerates which meant mostly forestry. Since the 19th century the Fennomane middle class had created their own institutions like banks and newspapers and literature to wrest power from the old Swedish-speaking elite. The purchase of Enso-Gutzeit and Tornator was also driven by the desire to rearrange the highest level of the economy. To shatter the final glass ceiling for the aspiring Finnish-speaking middle class, if you like. Kuisma wrote that after taking control of culture and finance, the nationalisations and subsequent establishment of other state-owned enterprises was the “clean up war” to finally settle the conflict and consolidate the new order. After they had passed into state-ownership, the controlling organs of both companies were immediately filled with Finnish speakers.

This conflict between the rising Finnish-speaking classes and the old Swedish-speaking elite revolved around two banks, the earlier mentioned KOP and the Swedish speakers’ Föreningsbanken i Finland, FBF (or Suomen Yhdyspankki, SYP in Finnish). Back then banks were still allowed to directly own industry and over the following decades the two banks and their influential leaders would vie for control over the economy, over corporations and over winning the state-owned enterprises as their customers. Decades later, in the 1990s, after the importance of the language question had waned and the Finnish speakers had won, they would merge to become first Merita Bank in the aftermath of the depression and later today’s Nordea. The story of the two banks is something I want to read more about when I find the time. Boring as it might sound, it was very important to Finland’s history.

Mass democracy and power

But languages were not the only variable. Class and political representation mattered, too. Critical to this story is that Finland had become a democracy with full voting rights for men and women. In agrarian Finland, this meant that the peasants became a very powerful voting bloc. Together with the nascent labour movement and their political representatives they delivered the votes to create the state-owned enterprises. These two groups saw the moneyed elite as threats and the state and enterprises controlled by it were a means to reign it in.

The political conflict about state-ownership continued through the 1920s and was solved with a compromise in 1930: the state may own corporations but they must be organised as stock companies (Oy in Finnish, Ab in Swedish) and operate without interference in their day-to-day business. The liberals thought that they had paved the way for easy privatisation within a few years but first came World War II and then the Cold War which put this goal on ice until the 1980s. The consequences of this compromise defined the course of the country for over half a century: the combination of mostly independent stock companies and state-ownership created the conditions for a new type of actor to emerge.

A part of the bourgeoisie had an interest in the state-owned enterprises, too. Men like Eero Mäkinen (Outokumpu) and Uolevi Raade (Neste) were not content with their country’s shallow economic depth and being merely a supplier of raw materials to more advanced economies. They wanted Finland to master new technologies, learn to process raw materials and rise up the ladder. State-owned enterprises were the means to this end. They were managers but behaved like entrepreneurs with a vision for their companies and their country. Kuisma writes that the principle-agent problem was solved in the state-owned enterprises: the CEO had broad freedoms to run the company but their mandates and missions were established at the founding and formulated to clearly that there was very little dissent between the owner and the management.

I don’t want to bore you with the detailed stories of these state-owned enterprises. It suffices to say that without them, many balls would have never started rolling. At independence forestry was the only scaled-up industrial sector with shipbuilding on the brink of becoming one. The economic and a part of the political elite were content with that. But because of the political landscape I mentioned earlier, they didn’t get their way. The state used state-owned enterprises to establish entire new industrial sectors from scratch. Big Money opposed each and all of those companies and fought their establishment tooth and nail. That didn’t prevent them from later vying to make their two big banks the housebank and privileged lender of the successful state-owned enterprises and surely they did not oppose buying them once they were privatised.

There were two major phases of establishing state-owned enterprises. The first was in the two decades after independence. The state nationalised the predecessors of Stora Enso and set up companies like Veitsiluoto (forestry), Rikkihappo- ja superfosfaattitehtaat (fertiliser, chemicals), Imatran Voima (utility) and Outokumpu (copper mining and processing). After World War II the state founded or reorganised companies that became today’s Valmet, Neste, Metso (Outotec) and Rautaruukki (part of SSAB) and even the private company Nokia owes a part of its success to the state because it sold the inventive telecoms company Televa to Nokia, the nucleus of its networks business.

What many of these companies had in common was that they were always interested in the newest technology, they were innovative: Outokumpo invented flash smelting, Neste researched renewable fuels early and Imatran Voima experimented with solar power. They did not crowd out or displace others and they created entirely new industries with a lot of room for private enterprise around them. Without Neste, no petrochemicals. Without Outokumpu, no sophisticated metals industries and mining technologies. Without Rikkihappo- ja superfosfaattitehtaat (Kemira’s predecessor), no complex chemicals industry. Even the silicon wafer producer Okmetic has its roots in a joint venture of Outokumpu and Nokia. Sea change after sea change in the economy downstream from one big state-owned enterprise.

The state reawakens

By the time of the Nokia boom of the late 1990s and 2000s, the Finnish state had become quite inactive. Most state-owned enterprises were listed at the Helsinki Stock Exchange and ownership had dropped below 50 per cent (exceptions are Posti, the railway company VR and alcohol retailer Alko who were however broken up, restructured and partly sold). Only after Finland had lost its flagship industry did the state again begin with active industry building albeit with slightly different methods. And again, it was the right side of the political spectrum that set things in motion. One case was the purchase of the Turku shipyard from Korea’s STX and the subsequent sale to Germany’s Meyer Werft. The Sipilä government (2015-2019) created the fund Valtionkehitys (Vake, lit. “state development”) equipped with a part of the remaining state-owned shares to channel the returns into new technology. Vake never began its work and was transformed into Ilmastorahasto (eng. the Finnish Climate Fund) by the Marin government which since 2020 has dished out 125 million euros to small companies in cleantech and other sectors but has under current government been incorporated into the state investment arm Tesi.

The Sipilä government also bought the bankrupt mining company Talvivaara, recapitalised it and turned it into today’s Terrafame and its parent company Finnish Minerals Group (finn. Suomen Malmijalostus), perhaps the most important of today’s state-owned enterprises. FMG is active in lithium mining and processing (Keliber), various other battery-related projects for which it orchestrates the transfer of foreign technology to Finland, mining R&D and the exploration of other mineral deposits in Finnish soils. Its scope is vast and it is likely that it will go down in history like Outokumpu: boring and almost forgotten but with a very rich legacy.

State-owned enterprises are important infrastructure builders. Gasgrid and its subsidiary Vetyverkko (lit. “hydrogen network”) are tasked with building the pipelines for the emerging hydrogen industry while Cinia is building transnational data cables to advance Finland’s position as a hub of big data centers. National power grid operator Fingrid has not only kept the grid in a shape that makes the Swedes jealous, it has also played an important role in the recent energy crisis and in the late 2000s it torpedoed another power line from Russia for national security reasons which pissed off a lot of Finnish (and Swedish) business leaders.

In the space between lies greatness

An active state clearly has worked very well for Finland and the unchecked Anglo-Saxon LARP of Finnish politicians and business leaders is not only silly but also potentially dangerous. Idiosyncrasies are real and if you have found a model that works for you, you should stick to it. Finland is not a big country in the middle of where the action is but a small periphery country that, if you leave it to what people call the “free market” (hint: it is never free), will always lose to countries with better location, geography and scale. In a small nation where the circles are small and the boundaries thin, the sharp distinction between public and private enterprise makes less sense than in America or England. Many Finns move nimbly between these camps and that is a good thing.

State activity was born out of necessity and was and is not practiced for fun. Business culture and the behaviour of the moneyed elites are not governed by natural laws, they vary country by country. In Finland, this is as true today as it was after independence, the private sector usually refuses to make the initial move to establish entirely new industrial sectors or build infrastructure. There are no Finnish industrialists today who want to build battery businesses or electric vehicles or hydrogen pipelines. The private capital that works with FMG comes from abroad. In the past there were no private initiatives competing with Neste, Outokumpu or Rautaruukki. Many of the liberal leaders were perfectly content with digging up copper from the Outokumpu mine and selling it to the Swedes, German or Americans who could process them and generate far more wealth with it. In the hydrogen sector, the Finnish state is dishing out all kinds of subsidies and tasked Gasgrid and Fingrid with building the infrastructure without which none of this would work. The pattern is always the same: the state sets up a company and around it private companies begin to operate.

I’m not a purist or socialist. I believe in productive conflict and compromise. It is unlikely that Finnish state-owned enterprises would have been as successful and innovative without the compromise of 1930, for the world knows enough sclerotic, moribund state-owned enterprises. It was exactly the contradictions of the competing political ideologies and interests that opened up the space where the companies could thrive and men like Mäkinen or Raade could pursue their visions for the country. The enterprises were mostly independent from state interference but bound by commitments to their country and its interests and led by ambitious and nationalistic men. Axel Solitander, who Kuisma calls “Hayek before Hayek”, spent over a decade fighting against state-ownership and for free trade and markets, and thus helped create the balance that would lead to the compromise. Even if unintentionally, with his crusade he did a big service to his country.

Ultimately, every country must look after its own interests because no one else does. Risto Ranki relates an anecdote how Finnish politicians travelled to Moscow in 1950 where they debated trade and whether a small nation needs its own steel plants. Stalin quipped “Experience says that purchased steel is cold.” Finland became a large steel producer a generation later.

Post-war SOE phases

1950s-60s: the second founding phase

1970s-80s: international expansion of SOEs and first IPOs

1990s-early 2000s: more privatisation

2000s: little activity

2010sff.: founding of new companies, nationalisations

Kuisma, Markku: Valtionyhtiöt - Nouso ja Tuho (2016)
Ranki, Risto: Niin siinä käy kun omistaa - Tarina Valtionyhtiöstä (2012)