The Problems of the Finnish Economy

In the post-Nokia and -paper world, the Finnish economy is too lopsided to grow properly.

This text appeared originally on my old blog in 2023.

Oh dear, I can’t believe I’m doing this again. We are at least the third election cycle into this mess and basic problems are still ignored or misunderstood. All political battles are fought over symptoms or issues that have very little to do with economic dynamism like government debt, taxes or unions. I wrote a longer text about the trouble caused by Nokia’s demise which is ignored almost entirely and by the polyproblems of demography, wrong educational priorities and lack of investment in R&D and infrastructure of which especially the second is so incomprehensible to the people in charge I might as well have it translated into Aramaic (the texts aren’t online at the moment). But there are more problems with the Finnish economy which I have only mentioned in passing: the lopsidedness of the economic structure, the thin layer of medium-sized manufacturers and pronounced regional disparities. I finish with a theory why the Finnish economy is so lopsided. But let’s begin.

Walk through a Finnish city or shopping mall and pay some attention to the businesses you see selling you stuff or providing you with services. Do you need a certain item and don’t mind getting enticed to buy a lot of other unnecessary things? The Danes and Swedes got you covered. Are you interested in buying new running shoes, a yoga mat or even a bike? Ask the Norwegians or Swedes. Or is it a pair of new pants you need, perhaps a tie or dress? Don’t worry, there are many Swedish and Danish stores you can visit. What about a gym membership? You get it.

Now visit a Swedish or Danish city and tell me how many Finnish gyms, clothing stores and other consumer goods businesses you see. And how many security patrols or cleaners with the logo of a Finnish company on their chest you run into. Finland has its own share of consumer goods producers and service firms but unlike their Nordic counterparts, you are much less likely to encounter them abroad. The Finnish home market remains of outsized importance to these companies and few ever venture abroad and if they do, they don’t expand and compete much. The famous Finnish design brands that merged into Manna & Co (Finlayson, Vallilla among others) make only 15 per cent of their money abroad. Even Marimekko, of whose grand expansion in East Asia you hear year by year, makes half of its money in its tiny home market which has not grown in 15 years. The fast food chain Heburger has only a minor number of locations abroad of which some are poor countries like Bulgaria or small like the Baltics. None in the rich Scandinavian countries. Consumer goods companies like Fiskars or Amer Sports are fine but they are small when compared with their Nordic peers and mostly a collection of acquired brands. I could go on but I will stop here.

Downstream from this limited international presence are the much discussed inferior Finnish marketing and other skills that are necessary to run a modern service business. Sixten Korkman pointed out years ago that the Finnish word for entrepreneurship, yrittäjyys, is less broad than the Swedish or Danish equivalents:

“Finland is home to a large number of business-owners, but many of them do not represent the modern-day definition of the Swedish word entreprenörskap. The word refers to business operations that innovatively combine a variety of functions, such as design, logistics, marketing and technology,” he says. “[Entrepreneurship] is not necessarily about trying persistently but primarily about innovation and brand development.”

H&M and Ikea, he points out, have combined numerous functions to create their successful business concepts.

“Finland is a country driven by engineers and technology. We have for decades built larger and larger paper machines. In Denmark and Sweden, businesses have adopted a wider perspective,” says Korkman.

There is no Finnish Tiger, Normal or Granit, no Fitness 24/7, no XXL or Stadium and no Gigantti and Power and Clas Ohlson. Fashion is almost entirely in the hands of foreign companies. No Ikea, no Lego, no Volvo, no H&M, no Novo Nordisk, no AstraZeneca, no Electrolux, no ISS and no Securitas. Sure many of these companies create jobs in Finland and a part of the money spent stays here but through them Finnish purchasing power and capital flows abroad where they help these companies build better skills in design, logistics and so forth if not outright production of goods. The intangible but decisive benefit of Swedish giants like Ikea and H&M isn’t the taxes they pay or even the things they produce in Sweden - Ikea’s HQ is in the Netherlands and they make few things in Sweden - but the expertise they have produced which over the decades was dispersed across the economy as people changed jobs, founded their own businesses or learned best practices in business school (and Ikea has done more for the brand of Sweden than any state-run agency ever will).

In Finland, such expertise is lacking. Nokia, the one big consumer goods producer Finland had, famously hired their first marketing VP only when the game was already lost and the position was shortly after axed. Once mobile phones went from tools with Snake on it to a highly marketed consumer good, Nokia faltered. Today Nokia is a lot more like the many other corporations on the Helsinki stock exchange: an infrastructure builder experiencing cyclical ups and downs. Nokia flew high for a moment only to crash and become very Finnish. Its technological legacy is rich but marketing consumer goods the Finns never learned.

A Twitter mutual, David Weiner, put it this way:

For decades, leaders have eschewed marketing as a cost-center and even still look at brand marketing as often unnecessary. That has thinned out the field of experienced brand marketers. & Many of the conglomerates seem to have focused on maximizing duopolies rather than expand.

Finland is a B2B country through and through. You see it in the old economy and in the fancy startup economy as well. Consumer-facing businesses like Wolt are rare. Mobile games is a nice sector to have but it is fickle and its indirect employment is low. Many startups cater directly to other businesses. But a successful economy needs both. When the downturn comes or if your trading partners chronically underinvest, exporting only expensive capital goods is a problem. Finns do marketing of course and it can be funny and imaginative. But they never learned how to market consumer goods to people other than Finns (and they increasingly brand goods they sell to other Finns in cringeworthy English).

There are some companies that have some presence abroad and it would help a lot if they kept expanding and acquiring. Puuilo, Motonet or Tokmanni come to mind or Hesburger. Kesko has recently acquired a major Danish hardware store. But despite this the number of companies that not only sell a collection of other people’s stuff but design their own and produce the missing expertise remains small.

The missing middle

Another problem with Finnish companies is in manufacturing, the bread and butter of any thriving economy: Finland has only very few medium-sized manufacturers that are big enough to produce local supply chains and have deep enough pockets to invest in R&D and finance customer acquisition abroad. Finnish giant conglomerates are global and act like it and the tiny ones struggle to grow and compete. The business newspaper Talouselämä compiled a list of Finnish Hidden Champions (paywalled) and judged that with only 20 entries, the list is rather short. On the list we find the audio hardware producer Genelec (revenue: 63m), the hospital equipment producer Lojer (50m) and the welding tool maker Pemamek (63m). Their revenue seems small but in Finland this is already quite a size. Finland also lacks companies that are large by Finnish standards but small by international ones. There are not enough companies like Ponsse and Valmet Automotive. You keep seeing journalists looking for the “new Nokia” but in reality it is the medium-sized ones that are few and far between and why entire regions are lagging behind.

Note that these companies are not concentrated in the capital area but spread across the country. I have said this before: the advantage of manufacturing is that it can happen almost everywhere. Modern service industries cluster in a handful of cities. Nokia had its HQ and R&D in Espoo, Oulu and Tampere but the manufacturing of phones, many billions worth in exports, happened in Salo near Turku. Finland needs better services but it also needs to make more things. Since 2008 its manufacturing output and manufacturing as share of GDP has shrunk dramatically and the decline of paper has hit the Eastern regions hard. The result of this are vast regional disparities that drag the entire economy down. Finland is a lot like Italy in that regard: the thriving regions aren’t strong enough to pull the whole economy.

Time compression

Why this lopsided structure compared to similar economies? Why is it that consumer goods are missing? I have a crackpot theory. Finland was a latecomer to industrialization. While the first industries like tar and shipbuilding go back centuries, modern industry - metals and machines, paper and pulp, chemicals, rubber - developed only in the 19th century. By the turn of the 20th century Finland had built an industrial base but it only became complex in the interwar period which ended with the devastation of World War II. But the foundation was there. In the post-war years Finland industrialized rapidly, driven by both state-owned enterprises and private conglomerates and strong demand from abroad. The war reparations to the Soviets, intended to make Finland dependent on trade, turbocharged industrial expansion as Finns hurried to make ships and machines and money to pay by 1952. The state-owned enterprises, all heavy industry, created entirely new sectors from scratch like steel, petroleum and petrochemicals or grew existing ones like chemicals, forestry, electrical equipment and mining.

In the 1970s and 80s the baby boomer generation founded companies around them and this is exactly when the music stopped. The talented entrepreneurs went into these burgeoning industrial sectors but not into consumer goods. By the 80s the birthrate had halved and the generations that came later were just much smaller which also meant less entrepreneurs and, it’s about probabilities, really, less talented people. The need to produce consumer goods at scale and sell them abroad has never become an important topic and we live with the consequences today. I can buy Kinder Bueno in every Finnish supermarket but I can’t buy Fazer Blue or Geisha in every German supermarket (to the loss of the Germans and every other peoples to whom Finland does not export its best chocolate).

What’s the bottomline? That it is not a mystery why Finland has fallen behind since the financial crisis. And that the problems most political warriors fight about are completely irrelevant and their solutions aren’t going to fix anything. Until Finland starts exporting consumer goods on a much larger scale and its service businesses expand abroad on a much larger scale and Finns catch up with the modern meaning of entrepreneurship, Finland will underperform. But given the demographic trajectory we are on, no one should expect any vibrancy in the future. If anything, things will ossify even more.