Pro-innovation responses to the crisis - examples of Finland and Korea
Finland experienced an exceptionally deep economic crisis during the first half of the 1990s. Within four years, output was reduced by more than 10% and the unemployment rate quadrupled to almost 17%. External shocks (the collapse of trade with the former Soviet Union in 1991, but also a sharp downturn in the OECD area), combined with a domestic banking crisis, led to a collapse of consumption and investment spending.
Overcoming the crisis required drastic measures to improve competitiveness and to consolidate public finances -- at the same time as very costly measures were needed to revive the banking sector. Most public expenditures were cut almost across the board, and some taxes were raised. The main exception to this was R&D spending, which was increased rather than cut.
Esko Aho
Vice President of Nokia and Former Prime Minister of Finland talks about Finland’s technology-led economic turnaround in the early 1990s.
(English, 4:20)
In particular, the counter-cyclical support of TEKES (the largest Finnish Funding Agency for Technology and Innovation) proved very important in reducing the depth and length of the downturn in business R&D, which helped lay the ground for a strong rebound. The government decision to complement macroeconomic stabilization measures with sustained investment in infrastructure, education and incentives for structural change helped put the Finnish economy on a stronger, more knowledge-intensive, growth path following the crisis.
Korea’s experience also illustrates how good crisis management can accelerate structural adjustment. The Asian financial crisis of the late 1990s led to significant down-sizing among large firms in Korea. This process was characterized by mass lay-offs of highly-skilled personnel, and large reductions in corporate R&D spending.
The response of the Korean government, in addition to boosting education expenditure, was to increase its R&D budget, to offset the decline in corporate R&D spending. Moreover, it used the crisis as an opportunity to develop a technology-based SME sector, using the Special Law to Promote Venture Firms (enacted in 1998). A co-ordinated mix of policy measures was put in place: regulations that helped improve the environment for venture start-ups and their growth; government-backed venture funds and tax incentives for investors; as well as measures to support research.
These measures fuelled rapid expansion in the number of corporate R&D labs (which numbered about 3000 at the time of the crisis, but grew to about 9000 by 2001) with SMEs accounting for 95% of this increase. On the eve of the crisis, there were about 100 “venture firms” in Korea. By the end of 1999, this number had increased to over 5000, and by the end of 2001, it had grown to over 11000. The long-term effects of these measures were striking. In 1997, SME spending accounted for just 12% of total business R&D, but by 2006, this figure had increased to 24%.
Of course, this success cannot be explained by policy intervention alone. The world-wide shift to a digital economy provided an exceptional business opportunity for people with technology and ideas – notably those being laid-off by large firms.
Nevertheless, government action helped shape an environment that enabled new businesses to seize upon these emerging opportunities.
