Transition Strategies for Finland’s Eastern and South‑Eastern Border Regions

12. Pilot proposals for Finland’s eastern and southeastern border regions

Abstract

This chapter proposes a set of pilot projects to support economic renewal, security preparedness and demographic resilience in Finland’s eastern and southeastern border regions. The suggested pilots aim to generate evidence, enable policy learning and support long-term regional transformation. Suggested initiatives include a Special Economic Zone (SEZ) to stimulate investment and industrial diversification, a labour and talent attraction pilot to address skills shortages and demographic decline, a Finnvera SME financing pilot to assist firms affected by the loss of Russian markets, and Security and Resilience Investment Zones (SRIZs) to strengthen dual-use industrial capacities and civil preparedness.

Introduction

This chapter outlines suggestions for implementing targeted pilot projects across Finland’s eastern and southeastern border regions. It responds to Output 4 of the project’s Detailed Project Description (DPD): the proposal to design and launch a pilot experiment in at least one region along Finland’s eastern border.

The suggested pilots are intended both to test specific policy interventions, described in Recommendations part of the report (Part II), and to serve as demonstration models for effective planning and reform. Each proposal made outlines the core elements and phases of implementation, including the institutional framework, delivery mechanisms, and evaluation methods needed to enable broader learning and policy dissemination.

While the proposed pilot projects vary in their thematic focus, each is designed to strengthen economic resilience and growth, support employment and business development, and address acute demographic and labour market challenges. In addition, the pilots aim to align with Finland’s long-term regional development goals and the strategic interests of both the national government and the eight eastern and southeastern regions.

It is essential that the pilots selected for implementation are chosen carefully, based on their potential impact, feasibility, and scalability. These initiatives are not stand-alone projects, but components of a broader transformation agenda aimed at reversing regional decline and promoting sustainable development in areas most affected by geopolitical disruption, economic adjustment, and demographic imbalances. Ultimately, the pilots are expected to generate actionable insights to inform national and regional policy reforms, while fostering cross-regional learning and co‑operation.

Special economic zone (SEZ): a strategic pilot for economic renewal

One of the most prominent and forward-looking pilot proposals emerging from the Recommendations presented in Part II is the establishment of a Special Economic Zone (SEZ) in one or more eastern or southeastern regions of Finland. This initiative has the potential to serve as a cornerstone of long-term economic revitalisation, aiming to attract domestic and foreign investment, stimulate industrial renewal, and mitigate the negative consequences of the disrupted Finnish-Russian economic ties.

The SEZ pilot would offer a unique opportunity to test whether geographically targeted incentives, combined with place-based development strategies, can generate meaningful economic transformation in structurally challenged regions. International experience - particularly from Poland, Italy, Latvia, and Northern Norway - suggests that when SEZs are embedded within broader regional development ecosystems, they may catalyse growth, support innovation, and enhance the resilience of local economies.

The establishment of an SEZ pilot in Finland would represent a significant policy innovation. Given its scale and potential impacts, such a pilot should be designed in alignment with Finland’s broader policy and regulatory framework. While this proposal is developed independently, its success will ultimately depend on how well it is embedded within national strategies and governance structures. Care should be taken to ensure coherence with any future initiatives in this area, so that experimentation at regional level supports, rather than fragments, the overall policy approach.

Strategic objectives and geographic focus

The SEZ pilot should be launched as a fixed-term, evidence-driven initiative, implemented in one or more carefully selected locations that combine strategic potential with practical readiness. Among the eight eastern and southeastern border regions, several areas could serve as promising candidates. While this report does not recommend specific regions for specific pilots, the most feasible areas for SEZ’s typically possess industrial or logistical advantages, such as proximity to ports, established business clusters, or existing energy and transport infrastructure, and could yield valuable insights into the economic impact of the SEZ model.

Importantly, the SEZ framework should allow for flexible territorial design. Rather than limiting incentives to rigid geographic boundaries, eligibility could be extended to areas that demonstrate strong local commitment to complementary investments, such as infrastructure upgrades or workforce development.

A phased approach is recommended, enabling continuous learning and iterative improvement1. In the first phase, efforts should focus on preparing and validating baseline information. The second phase should involve selecting the function and location to be piloted and confirming the pilot project’s objectives. The third phase should define the governance and funding arrangements for the pilot. The fourth phase should ensure stakeholder engagement and develop an appropriate decision-making model. The fifth phase should cover the implementation of the pilot, while the sixth should focus on monitoring and evaluating its impacts. These phases should not be seen as strictly sequential but rather as overlapping and reinforcing each other. Following this approach would help build a strong foundation for scaling up or adapting the model in future phases.

Tailored incentive framework

The success of the SEZ pilot will depend not only on location, but on the careful design of regulatory and fiscal instruments. Drawing from comparative cases, the incentive package should be diversified and time-bound, with emphasis on transparency, proportionality, and alignment with Finnish policy priorities. A Finnish SEZ might include:

• Modest and targeted tax or employer contribution relief, particularly for high-value, labour-intensive, or R&D-driven investments.

• Simplified administrative and permitting procedures, reducing regulatory burdens for SEZ firms.

• Access to tailored infrastructure investments, including transport, energy, and high-speed digital connectivity.

• Support for skills development and R&D collaboration, with active links to higher education and vocational institutions.

Rather than focusing solely on foreign investors, the SEZ should create links to domestic firms, particularly SMEs, and encourage their integration into the investment ecosystem through supplier linkages, clustering strategies, and innovation partnerships.

Skills and innovation integration

Education and skills development should be central to the SEZ’s value proposition. As the Łódź SEZ in Poland demonstrates, close co‑operation between SEZ governance bodies, local companies, and educational institutions can create sector-specific training pipelines and foster employment readiness. In the Finnish context, this could involve:

• The establishment of dedicated vocational training programmes aligned with SEZ industry needs.

• Partnerships with universities and applied science institutions to promote research-industry co‑operation and support talent attraction.

• Involvement of local innovation actors and development agencies to stimulate regional entrepreneurship and knowledge spillovers.

Governance and evaluation framework

Effective implementation of the SEZ pilot requires robust multi-level governance (MLG). The experience of Italy’s SEZ “Unica” model illustrates the importance of inter-ministerial and intergovernmental co‑ordination to align priorities, funding instruments, and regulatory frameworks. A dedicated national SEZ co‑ordination team could play a similar role in Finland, ensuring that regional councils and municipal governments, business representatives, and national agencies work in tandem.

To ensure accountability and learning, a strong monitoring and evaluation system should be embedded from the outset. This includes:

• Baseline assessments of local socio-economic conditions.

• The definition of control areas and businesses to enable counterfactual analysis.

• The use of clear, transparent criteria for evaluating economic and social outcomes, including employment, investment, productivity, and fiscal impacts.

• Structured feedback loops to allow for real-time policy adjustments and course correction.

Broader development impacts

The SEZ should not become an enclave of privileged firms. To maximise its legitimacy and impact, it must be deeply embedded in the regional economic fabric and aligned with Finland’s Smart Specialisation Strategies (S3). SEZs should serve as catalysts for broader development goals: revitalising rural and industrial areas, enabling transitions to low-carbon production, and improving resilience to external shocks.

To this end, the incentive framework should be graduated, offering enhanced support in the most structurally disadvantaged areas, and ensuring that benefits - jobs, procurement, innovation - extend beyond zone boundaries.

Focusing on pilots with national significance

The establishment of a Finnish SEZ pilot would not only be an economic experiment - it would also be a strategic governance innovation. If well implemented, it can generate investment, anchor new industrial activities, and support communities navigating post-border shock recovery. But its success will depend on more than incentives: it will require vision, institutional co‑ordination, long-term learning, and meaningful public-private partnerships.

Finland’s reputation as a policy laboratory - demonstrated in the Kainuu self-government and employment service pilots - positions it well to design and implement a best-in-class SEZ model. Rather than adopting a one-size-fits-all approach, Finland can tailor its SEZ framework to reflect domestic economic values: transparency, equity, social inclusion, and place-based opportunity.

Suggested selection criteria for identifying a SEZ pilot region(s) in eastern and southeastern Finland

The selection of a suitable pilot region for establishing a Special Economic Zone (SEZ) in Finland’s eastern and southeastern border areas should be based on a clear, evidence-based framework. Drawing on international best practices, as well as the specific geographic, economic, and institutional context of Finland, a set of tailored criteria is proposed to guide the decision.

At the core of the selection process should be three minimum conditions that any candidate region must meet. First, the region must face clear and persistent economic and demographic challenges that justify targeted intervention. These include high unemployment, population decline, weak private sector activity, and limited investment. The SEZ should be positioned as a tool to counter these structural disadvantages and catalyse new development.

Second, the success of a SEZ depends heavily on the capacity and commitment of local and regional institutions. The selected region must demonstrate readiness to implement and manage SEZ activities in close co‑operation with national authorities, including the ability to co‑ordinate land use planning, investor services, and regulatory support.

Third, a basic level of infrastructure availability is essential. This includes accessible industrial land, reliable transport connections (road, rail, or port), digital infrastructure, and energy capacity. While the SEZ may trigger further infrastructure investment, a foundational level is necessary from the outset to ensure viability2.

In addition to these core requirements, a number of strategic enhancer criteria should be considered to differentiate among eligible regions and ensure the greatest possible impact from the pilot. One such criterion is the region’s geopolitical and logistical relevance. Border regions that host or are near key transport corridors, former customs infrastructure, or dual-use logistics facilities may offer unique advantages for the SEZ.

Another important factor is the existence of undeveloped or emerging sectoral strengths that the SEZ could reinforce. These might include bioeconomy value chains, sustainable energy, digital services, or industrial renewal. The presence of research institutions, vocational training centres, or previous industrial activity can increase the likelihood of success.

The interest and engagement of the private sector is also critical. The presence of anchor firms, willingness of local entrepreneurs to expand, or expressions of interest from external investors can provide important early momentum for the zone. Public-private partnerships, in particular, may play a key role in infrastructure development and workforce planning.

Ideally, the SEZ pilot would align with national and EU-level policy frameworks. This includes synergies with Finland’s Eastern and Northern Finland Programme priorities, the green transition, EU funding mechanisms. Such alignment increases the likelihood of co-financing and ensures that the SEZ contributes to broader territorial cohesion and innovation goals.

Finally, the region should be suitable for regulatory experimentation and policy learning. As a pilot, the SEZ must be able to test new administrative models - such as streamlined permitting procedures, digital governance tools, or targeted green incentives - without excessive regulatory obstacles or political resistance.

Pilot project to tackle critical labour shortages

Equally pressing is the challenge of addressing regional labour shortages and demographic decline. To respond to these interconnected issues, a pilot could be implemented that integrates three mutually reinforcing elements: financial incentives to alleviate acute skill shortages, a regionally co‑ordinated international talent attraction and retention strategy, and a regional competence development framework inspired by successful international models, including Sweden’s Lulea pilot and Canada’s Atlantic Immigration Program.

This proposed pilot acknowledges that no single intervention can resolve the region’s human capital challenges. Instead, it should seek to create a systemic response through regional co‑operation and strong partnerships with the private sector. The proposed pilot could include financial instruments - such as student loan forgiveness, wage subsidies, and housing support - aimed at attracting and retaining skilled workers, especially in sectors suffering from labour shortages. These tools could be complemented by a co‑ordinated approach to international talent attraction, which aims to lower administrative barriers, improve relocation support, and better align migration with regional labour market needs. Building on this foundation, the pilot should also strengthen the role of vocational training and adult education, ensuring that training provision is aligned with real-time employer demand. Local education providers, businesses, and employment services will collaborate to develop modular and responsive training pathways that anticipate future skills needs.

Together, these initiatives could yield significant returns in terms of employment, productivity, and demographic stabilisation. The impact evaluation should assess not only immediate quantitative outcomes - such as changes in employment rates or inflows of skilled workers - but also the qualitative dimensions of stakeholder satisfaction, system responsiveness, and institutional learning. Importantly, comparative assessments will be carried out between participating and similar non-participating regions (counterfactual) to determine the relative effectiveness of different instruments.

Suggested selection criteria for pilot regions

The proposed pilot initiative seeks to generate a response to the intertwined challenges of regional labour shortages, demographic decline, and skills mismatches. To maximise its impact and policy relevance, the selection of pilot regions3 should be based on both need and opportunity - that is, regions must present both a compelling case for intervention and a feasible context for implementation. The ministry or ministries responsible for the piloting should then make the decision (for example the Ministry of Economic Affairs and Employment and Ministry of Finance).

The following criteria are proposed to guide the selection of pilot regions:

Labour market and demographic pressure

At the core of the pilot is the need to address critical and persistent labour shortages, particularly in sectors of strategic regional importance such as healthcare, education, ICT, green technologies, or manufacturing. Candidate regions should also show signs of long-term demographic decline, including net out-migration, ageing population structure, and declining labour force participation. Regions where international students already form a significant inflow, but where retention after graduation remains low, may be given priority, to use the pilot to test measures that help convert this existing talent pool into a long-term workforce.

Indicators may include sector-specific vacancy rates, employment rates, dependency ratios, population trends, regional projections of working-age population decline, or risk of production disruption due to labour shortages and retention rates of international graduates.

Regional co‑ordination capacity

Given the integrated design of the pilot, strong regional co‑ordination mechanisms are essential. Participating regions should demonstrate the presence of functioning regional partnerships between municipalities, employers, education providers, employment offices, and civil society actors. Prior experience with regional workforce planning, educational alignment, or migration initiatives is considered an asset. In regions with a strong higher education presence, co‑ordination capacity should also include partnerships between universities, employers, and municipalities to support transition from studies to employment.

Indicators may include existence of a regional development or skills strategy, experience in multi‑stakeholder initiatives, and operational capacity of co‑ordinating bodies.

Willingness to innovate in talent attraction and retention

The pilot could test new instruments, including student loan forgiveness, relocation support, and wage subsidies, alongside streamlined international recruitment and settlement services. Candidate regions must be open to policy experimentation, including the use of digital tools, employer co-financing, or international partnerships for skilled migration. Particular attention could be given to regions willing to pilot retention-oriented measures for international graduates, such as enhanced internship systems, career guidance, and regional familiarisation programmes.

Indicators may include interest expressed by regional leaders or councils, local employer participation in international recruitment, and openness to regulatory pilots, and documented initiatives to improve graduate retention.

Training system adaptability

A core element of the pilot is the creation of modular, demand-responsive training pathways for both domestic and international workers. Participating regions should have education and training providers capable of co-designing short-cycle programmes in co‑operation with employers.

Indicators may include flexibility of local vocational institutions, capacity to deliver adult and continuing education, and evidence of business-education co‑operation.

Sectoral anchor potential

While broad labour shortages are a concern, the pilot should be anchored in sectors that offer both economic relevance and practical feasibility for talent attraction and training interventions. These may include sectors where Finland has a strategic interest (e.g., energy transition, digital infrastructure, green growth).

Indicators may include cluster presence, export relevance, and sector growth potential.

Baseline data availability and evaluation readiness

As the pilot includes comparative impact evaluation, selected regions must have accessible labour market and demographic data, as well as the capacity to monitor and report on outcomes in a timely and systematic manner.

Indicators may include access to municipal or regional data systems, co‑operation with Statistics Finland or research institutes, and staff assigned to support evaluation.

Table 12.1. Potential criteria structure for pilot region selection

Minimum conditions	Enhancing criteria
Severe labour shortages and demographic pressure	Experience with international recruitment or talent programs
Significant inflow of international students combined with low retention after graduation	Existing initiatives to retain international graduates (e.g. internships, career guidance, regional familiarisation programmes)
Regional co‑ordination mechanisms in place	Existing employer-education partnerships
Openness to policy experimentation and migration tools	Strategic sectors with innovation or export potential
Capacity for evaluation and data development/sharing	Complementary regional strategies or existing pilot implementation infrastructure

Piloting Finnvera´s funding for SMEs

Another urgent need stems from the difficult situation faced by many small and medium-sized enterprises in the region, particularly those affected by the loss of access to Russian markets and disrupted supply chains. To address this, a pilot financing programme could be launched through Finnvera, Finland’s state-owned financing company. This pilot programme could offer direct loans and risk-tolerant financing to businesses in the most affected areas. The objective would be to support business continuity, safeguard employment, and foster post-crisis recovery. The pilot would test whether more flexible financing terms and more proactive outreach can fill existing market gaps. Outcomes could be monitored in terms of business survival rates, job preservation, and new business development, with results compared to similar firms in non-pilot areas4.

To ensure impact and learning, the following criteria could be considered by the Ministry of Economic Affairs and Employment to select pilot regions:

• High exposure to Russian market disruptions

  • Regions where a significant share of SMEs relied on Russian trade, logistics, or customers prior to 2022.

• Prevalence of SME distress

  • Evidence of business closures, reduced access to credit, or elevated financial vulnerability among SMEs.

• Strong employment dependence on SMEs

  • Areas where SMEs play a key role in sustaining local employment and economic activity.

• Readiness for local co‑ordination

  • Presence of active business support organisations and willingness of local stakeholders to partner with Finnvera.

• Potential for recovery and adaptation

  • Diverse SME base with firms that could reposition, innovate, or grow with appropriate financing.

• Monitoring and evaluation capacity

  • Ability to support data collection on firm performance, employment, and use of financing tools.

Piloting security and resilience investment zones

The proximity of Finland’s eastern and southeastern regions to the Russian border creates both strategic risks and unique development opportunities. In light of heightened geopolitical uncertainty, this pilot proposes the establishment of Security and Resilience Investment Zones (SRIZs) to support regional development through investments in dual-use technologies, civil protection, and strategic logistics. The initiative aims to combine economic renewal with strengthened national preparedness and industrial resilience.

The suggested pilot aims to facilitate the emergence of industry clusters that serve both civilian and security-related needs, including by activating the dual-use potential of existing firms. Many SMEs already operate in areas such as advanced manufacturing, ICT, and logistics, and could be supported to adapt or expand their activities toward resilience-oriented markets, while carefully balancing economic opportunity with security considerations. Given the growing European demand for defence and dual-use goods, these zones could support the production of non-sensitive components and technologies aligned with regional industrial strengths and national security priorities.

While the location and nature of investments will ultimately be driven by private sector decisions‑based on market potential, risk assessments, and the availability of incentives – the pilot would support the formation of regional RDI clusters in areas such as cybersecurity, logistics resilience, surveillance technologies, including unmanned aerial systems, data-driven situational awareness, and crisis response systems. Public and private actors would be encouraged to collaborate for instance on the development of simulation and training facilities, applied innovation platforms, and dual-use manufacturing capabilities. A particular focus of the pilot should be to strengthen civil protection systems and promote investments in infrastructure that enhance both economic and security preparedness, such as energy reliability, emergency communication networks, and digital infrastructure.

Workforce development is another central element of the pilot. Partnerships with universities of applied sciences, vocational training institutions, and national research institutes could be promoted to ensure a skilled labour supply and support knowledge transfer. Education and training programmes should be developed in areas such as digital security, technical maintenance, and emergency logistics. These efforts would not only support SRIZ activities but also build local resilience and employment opportunities.

Civil society resilience and public engagement

An essential feature of the SRIZ pilot should be the active involvement of civil society in building resilience. Drawing on lessons from South Korea and Estonia, the pilot would aim to foster community‑based preparedness systems and promote a whole-of-society approach to security.

Inspired by South Korea’s neighbourhood volunteer teams, Finnish regions could establish community‑based resilience groups co‑ordinated by municipalities and supported by national authorities. These groups could play a role in disseminating information, supporting vulnerable populations during crises, and participating in emergency simulations. Training could be provided to volunteer leaders, with municipalities responsible for outreach and co‑ordination. Local traditions of volunteerism and community spirit, especially strong in rural Finland, can be mobilised to strengthen social cohesion and collective preparedness.

Similarly, Estonia’s experience in cybersecurity highlights how technical communities and volunteers can enhance regional resilience. The SRIZ pilot could encourage the creation of local cybersecurity networks made up of IT professionals, students, and public servants, providing support to municipalities in maintaining secure digital infrastructure. These groups could also participate in national preparedness exercises and assist in responding to cyber incidents. Public education on digital security and awareness-raising initiatives would further support societal engagement.

Existing regional preparedness platforms, such as the Kainuu Preparedness Forum, illustrate how multi-actor co‑operation can be mobilised to support civil protection. SRIZ pilots could draw on and expand such models.

Through these mechanisms, the pilot seeks to create a culture of shared responsibility for resilience, embedding preparedness in everyday life, and strengthening trust between citizens, local authorities, and national institutions.

To ensure credibility and safeguard against unintended consequences, the pilot would adhere to strict location and governance criteria. A transparent screening process would be developed to evaluate proposals for SRIZ designation, including a review of security risks, industrial feasibility, and local governance capacity. The zones would be designed to complement, not duplicate, national security infrastructure.

Suggested selection criteria for pilot regions

To ensure strategic relevance, institutional feasibility, and developmental impact, the selection of pilot regions for the Security and Resilience Investment Zones (for example, by the Ministry of Economic Affairs and Employment) should be based on a clear and context-sensitive set of criteria. These are structured across minimum conditions and strategic enhancer criteria:

Minimum conditions

• Institutional readiness: Presence of local and regional authorities capable of co‑ordinating multi‑actor partnerships, including experience in public safety, civil protection, or economic development.

• Civil and technical infrastructure: Availability of basic infrastructure (e.g., broadband, energy, transport) and access to public facilities or training institutions that can support pilot activities.

Enhancing criteria

• Existing or emerging dual-use potential: Evidence of clusters, R&D institutions, or SMEs active in security-relevant sectors (e.g., logistics, cybersecurity, manufacturing).

• Demonstrated private sector interest: Commitments or expressions of interest from businesses in contributing to resilience-related innovation or production.

• Community engagement capacity: Active civil society organisations, volunteer networks, or local safety committees that could support preparedness and societal resilience activities.

• Alignment with regional strategies: Coherence with smart specialisation strategies, regional development plans, or national resilience frameworks.

• Evaluation and data capacity: Ability to monitor and report on pilot progress, including baseline data collection and co‑operation with national evaluation bodies.

Regions meeting these criteria would be strong candidates to lead the piloting of SRIZs, ensuring both developmental relevance and alignment with national resilience goals.

Evaluation would focus on multiple dimensions, including the volume of dual-use and preparedness‑oriented investments, the growth of related employment, innovation outputs (e.g. patents, prototypes), and levels of public-private collaboration. The pilot would also track improvements in local and regional civil protection systems and crisis management readiness. These metrics would help assess whether SRIZs are meeting their twin goals of supporting regional development and enhancing national resilience.

By piloting Security and Resilience Investment Zones, Finland would have the opportunity to test a novel form of place-based economic policy that integrates national security imperatives with regional growth. They should not be conceived as isolated enclaves of enhanced security, but as pilots designed to generate transferable lessons and approaches that can be adapted across Finland’s regions. If successful, these zones could serve as replicable models for other border regions across the EU facing similar geopolitical and economic challenges.

Importantly, this pilot would directly support the goals of Finland’s Security Strategy for Society, which emphasises a comprehensive security approach based on collaboration between authorities, businesses, civil society, and citizens. The SRIZ model operationalises these principles by fostering regional-level co‑operation, building community-based resilience, and enhancing critical functions such as digital security, civil preparedness, and infrastructure continuity. In doing so, it could contribute to safeguarding the vital functions of society while promoting balanced regional development in strategically important areas.

Implementation roadmap for pilot projects in Finland’s eastern and southeastern regions

The following implementation roadmap outlines a suggestion for a systematic approach for the effective implementation of pilot projects aimed at fostering regional development, economic resilience, and demographic revitalisation across Finland’s eastern and southeastern border regions. It considers governance, stakeholder engagement, funding models, and impact evaluation methodologies.

The recommended pilot actions can be implemented in a variety of ways. It is assumed that central government, the regions, municipalities and other relevant stakeholders have set up the appropriate co‑ordination mechanisms and bodies to lead the pilot projects and that they have defined clear roles and responsibilities for the different stakeholders involved, as well as the principles of decision-making and financing.

PHASE 0: Preparation and validation of baseline information

• Consolidating the database, assessing the baseline and anticipating needs by year 2030.

  • Consolidate existing data and update regional economic, demographic, and social baseline indicators.

  • Conduct forecasting and scenario analysis to anticipate regional needs by 2030.

  • Validate data and assumptions through stakeholder workshops and expert consultations.

Outcome: Comprehensive baseline database for informed decision-making.

PHASE I: Project definition and selection

• Reassessing and confirming the project objectives for the pilot.

  • Clearly define and reassess objectives of proposed pilots based on updated regional strategies and needs.

• Selecting and deciding the projects to be implemented.

  • Engage national and regional stakeholders to identify priority projects (e.g., SEZ, talent attraction incentives, bioeconomy initiatives).

• Defining the targeted state of activities in year 2030.

  • Set clear and measurable targets for project outcomes by 2030.

Outcome: Selection and formal approval of prioritised pilot projects.

PHASE II: Governance and funding arrangements

• Define suitable governance models (e.g., contractual co‑operation, joint municipal authorities, public-private partnerships).

• Identify and confirm appropriate funding models, including cost-sharing principles among municipalities, regional councils, private sector participants, and national or EU funding streams.

Outcome: Agreed governance and financing framework for each pilot.

PHASE III: Stakeholder engagement and decision-making

• Consulting relevant stakeholders on proposed pilot actions

  • Conduct comprehensive stakeholder consultations to refine pilot scopes and ensure broad-based support.

• Deciding on the implementation of the activity to be piloted

  • Facilitate final decision-making sessions among key stakeholders to secure commitment and formalise agreements.

• Deciding on the funding model to cover the costs of the pilot (i.e., principles of cost-sharing between key stakeholders)

  • Finalise funding arrangements, specifying clear roles, responsibilities, and financial contributions.

Outcome: Broad stakeholder endorsement and finalised funding agreements.

PHASE IV: Implementation and operational launch

• Establishing a body for carrying out the pilot

  • Establish dedicated implementation bodies or steering committees responsible for oversight and co‑ordination.

• Implementing the recommended pilot actions

  • Develop detailed action plans, timelines, and monitoring frameworks.

• Monitoring impact evaluation

  • Officially launch pilots and initiate operational activities according to the agreed timelines.

Outcome: Operational pilots with clearly established oversight structures.

PHASE V: Monitoring, evaluation, and adaptation

• Implement rigorous monitoring and impact evaluation frameworks, employing both qualitative and quantitative metrics.

• Conduct periodic reviews to assess progress, adjust activities as necessary, and ensure accountability.

• Disseminate interim and final evaluation findings broadly to facilitate learning and potential scaling-up or replication.

Outcome: Comprehensive documentation and learning resources to inform regional policy decisions and broader application.

Optional PHASE: Legislative and financial system adjustments (as needed)

• Identify necessary legislative amendments to support innovative pilot mechanisms (e.g., SEZ incentives, governance structures).

• Propose adjustments to national or regional funding formulas to better align resource allocation with pilot objectives.

  Outcome: Supportive legislative and financial environment facilitating long-term sustainability of successful pilot initiatives.

Table 12.2. Summary of pilot proposals

Pilot	Core objective	Suggested selection criteria	Possible lead institutions	Expected outcomes
Special Economic Zone (SEZ)	Stimulate investment and industrial revitalisation through geographically targeted incentives	Structural economic challenges; institutional and infrastructure readiness; sectoral development potential (e.g. logistics, energy); private sector engagement	Ministry of Economic Affairs and Employment, Regional Councils, municipalities, Business Finland, Confederation of Finnish Industries (EK)1, Suomen Yrittäjät2.	Increased private investment; SME integration into clusters; R&D and skills partnerships; local job creation
Labour and talent attraction	Address skill shortages and demographic decline through incentives, international recruitment, and modular training	Persistent labour shortages; demographic pressure (e.g. net out-migration, ageing); regional co‑ordination mechanisms; training system adaptability	Municipalities, Regional Councils, regional Economic Development Centres, Employment Areas, Education providers, Ministry of Economic Affairs and Employment, EK, Suomen Yrittäjät	Improved workforce availability; higher employment in key sectors; retention of skilled labour; stronger migration integration pathways
Finnvera SME financing pilot	Support post-shock SME recovery through flexible finance instruments	High SME exposure to Russia-related trade disruption; signs of SME distress; local capacity for co‑ordination and outreach	Finnvera, municipalities, Regional Councils, Business Development Agencies, Ministry of Finance, Ministry of Economic Affairs and Employment, Suomen Yrittäjät, private banks	Business continuity and survival; job retention; SME investment in adaptation and innovation
Security and Resilience Investment Zones (SRIZs)	Enable security- driven economic diversification and community-based resilience	Institutional and civil society readiness; existing or emerging dual-use potential; security-informed location (not vulnerable); alignment with resilience and preparedness strategies	Ministry of the Interior, Ministry of Defence, Regional Councils, Universities and RDI institutions, Municipalities, Civil society actors (including local volunteer organisations and digital security networks)	Development of dual-use clusters; strengthened civil protection; increased cybersecurity and digital resilience; community-based preparedness networks

1. Both EK and Suomen Yrittäjät represent business interests, and could bring important information and expertise needed to establish the pilots.

2. Suomen Yrittäjät is an interest organisation for small and medium-sized enterprises (SMEs). Suomen Yrittäjät in particular plays a key role in voicing SME needs and could help promote uptake and feedback on financing tools.

Lessons from previous pilot experiments at the regional level in Finland

Assessment of the impact of accelerated depreciation in Finnish development areas

In 2011, the VATT Institute for Economic Research published an evaluation of Finland’s regional tax incentive scheme allowing accelerated depreciation for investments in designated development areas5 (kehitysaluepoisto) (Grönberg and Kosonen, 2011[1]). The policy, established under Law 1262/1993, permitted eligible firms to deduct depreciation at a rate 50% higher than standard for certain production‑ and tourism-related investments over the first three years. The objective was to stimulate business investment in economically lagging regions by reducing the cost of capital and improving cash flow through temporary tax relief.

The VATT evaluation assessed whether firms eligible for the incentive actually made larger investments than those in comparable but non-eligible areas. Using tax and financial data from the Finnish Tax Administration’s YRTTI database, the study analysed investment behaviour across all Finnish firms from 2002 to 2009. Companies were divided into treatment and control groups based on their location, and regression methods were used to account for observable and unobservable differences between the groups.

The findings revealed no statistically significant impact of the accelerated depreciation scheme on investment volumes. Although firms in the development areas reported slightly higher average investment levels (about 1.7% more), the difference was not statistically significant. Furthermore, among the firms that actually made use of the scheme - only 0.6% of those eligible - no evidence was found that they invested more than other firms. Even when controlling for firm size, sector, and local conditions, the results showed no statistically significant relationship between the use of the tax incentive and investment behaviour.

In summary, the report concluded that the “kehitysaluepoisto” scheme had no substantial impact on investment decisions at the aggregate level. Its use was limited, and even among those who utilised the incentive, the policy did not appear to drive additional investment. These results highlight the challenges of designing effective regional tax incentives, particularly when uptake is low and the incentives fail to address the fundamental constraints to investment.

Evaluating payroll tax relief in Northern Finland: Lessons from Lapland and Kainuu

In 2003, the Finnish Government launched a regional experiment to reduce employers’ labour costs in selected municipalities in Northern Lapland and the archipelago, with the aim of improving employment outcomes. Employers in the target areas were granted an exemption from national pension and health insurance contributions - collectively referred to as sosiaaliturvamaksut - up to EUR 30 000 annually per firm. This exemption represented a 3–6% reduction in wage-related costs. The policy was later extended to Kainuu as part of its regional governance experiment beginning in 2005 and ultimately continued through 2012.

The primary objective of the scheme was to test whether lowering employer-side social security contributions could enhance firms’ ability to hire, improve profitability, and potentially boost employee compensation. The experiment was notable in that it included a statutory requirement for rigorous ex post evaluation and allowed researchers access to relevant administrative data - an uncommon practice in Finnish regional policy at the time.

The VATT Institute for Economic Research conducted a comprehensive impact assessment using rich administrative data sets, including firm-level financial records, employment registers, and wage structure data from Statistics Finland (Korkeamäki, 2011[2]). Treatment firms in Lapland and Kainuu were compared to a control group of similar firms in other northern and eastern regions, excluding major cities and industrial hubs like Kuopio, Joensuu, and Kemi-Tornio to ensure comparability.

The findings were unambiguous: the payroll tax exemption had no statistically significant effect on employment, wage levels, profitability, or working hours. While the policy did clearly reduce employer contribution liabilities – as reflected in accounting data – according to the results it did not translate into measurable improvements in firm behaviour or labour market outcomes. Even among firms that stood to benefit most from the scheme, such as smaller and labour-intensive businesses, no significant positive impacts were detected.

There were minor indications that wage growth may have been slightly lower in the treatment areas, and working hours marginally higher, but these results were not robust. Similarly, the analysis did not find evidence that the exemption increased firm survival rates or incentivised expansion. The only confirmed outcome was fiscal: a redistribution of public revenue via foregone social security contributions, without clear economic gains.

This evaluation reinforces the broader lesson from international experience: labour cost reductions through payroll tax cuts do not automatically lead to higher employment or investment, particularly in remote or structurally disadvantaged regions. The findings suggest that such instruments, if used in isolation, are unlikely to alter firm behaviour meaningfully. More comprehensive and better-targeted interventions may be needed to stimulate regional economic development where structural weaknesses persist.

Regional self-government in practice: Insights from the Kainuu experiment

Between 2005 and 2012, Finland piloted a regional governance model in the eastern region of Kainuu. The Kainuu self-government experiment marked the first time in Finnish administrative history that a directly elected regional council was granted comprehensive responsibility for managing a broad range of public services, including health and social care, upper secondary education, and regional development. The objective was to assess whether governance at the regional level could enhance the efficiency, quality, and responsiveness of public services while generating cost savings through administrative consolidation and improved co‑ordination (Ministry of Finance, 2013[3]).

From an administrative perspective, the experiment was implemented successfully. The newly established Kainuu Regional Council took over responsibilities previously divided among municipalities and the state, streamlining decision-making and establishing a more coherent service delivery model. The centralisation of functions under a single authority aimed to reduce fragmentation, support long‑term planning, and respond more effectively to regional needs.

The most notable improvements emerged in health and social services. Integration under a single regional provider led to clearer service pathways and better organisational coherence. Costs remained relatively stable during the early years, and there was some evidence of more effective cost control compared to other Finnish regions. Importantly, access to care and patient satisfaction either improved or remained stable, with no adverse effects observed.

However, expenditure impacts were more mixed. According to a separate VATT analysis of municipal spending, the shift of service responsibilities to the regional level did not result in a measurable reduction in total municipal expenditures (Hämäläinen and Moisio, 2015[4]). Overall spending in Kainuu municipalities grew at a pace similar to that in comparison regions. This suggests that regionalisation alone did not lead to significant fiscal savings.

That said, the composition of municipal expenditures changed. In municipalities that transferred responsibilities to the regional council, administrative overhead costs decreased, indicating some efficiency in local governance structures. Conversely, health care expenditures increased slightly faster than in the control municipalities, possibly due to demographic pressures, transitional costs, or expanded service provision. The evaluation found no clear evidence of overall cost-efficiency gains, and the financial impact varied between municipalities based on their degree of participation in the regional arrangement.

The effects on education services were modest. The regional governance model did not produce significant improvements in student outcomes or service efficiency, and the sector continued to operate much as before the reform. This contrasted with the more visible changes in the health and social care domain.

The experiment also revealed shortcomings in democratic legitimacy and public engagement. While the introduction of a directly elected regional body was a significant institutional innovation, voter turnout in regional elections remained lower than in municipal elections, and public awareness of the new governance structure was limited. The regional council struggled to gain visibility among residents, raising questions about accountability and the political sustainability of such governance arrangements.

In conclusion, the Kainuu self-government experiment demonstrated that regional governance can enhance service integration and administrative co‑ordination, particularly in the health and social care sector. However, it fell short of delivering the anticipated reductions in public spending, and it underscored the need for complementary reforms – particularly in democratic accountability, role clarity between governance levels, and mechanisms to engage citizens.

While not a definitive solution to structural challenges in local government, the Kainuu model offered valuable practical insights into the benefits and limitations of regionalisation. It also provided a reference point for Finland’s subsequent 2023 reform, which established wellbeing services counties as a new national framework for regional service provision.

Municipal employment service pilots in Finland

Between 2021 and 2024, Finland undertook a major decentralisation experiment in employment policy through the municipal employment pilots (työllisyyden kuntakokeilut). In these pilots, selected municipalities assumed responsibility for public employment services for specific jobseeker groups, including young people, immigrants, and long-term unemployed. The reform aimed to test whether municipalities - being closer to local labour markets and social services - could deliver more effective, tailored employment support than the nationally operated TE Offices.

The evaluation of the pilots presents a mixed but largely instructive picture of the reform’s impacts and implementation. On the one hand, the shift to municipal-level employment services enabled closer integration with social and health services, improving service continuity, especially for jobseekers in vulnerable situations. Municipal actors were able to apply a more holistic approach to client support, often building stronger connections with local education providers and employers (Aho et al., 2024[5]).

However, significant variation emerged between pilot regions. Some municipalities quickly adapted to the new role, leveraging local networks and resources effectively. Others faced difficulties due to limited administrative capacity, challenges in staff recruitment, or fragmented information systems. A key barrier across the board was the lack of integration between state and municipal digital platforms, which restricted access to timely data and hindered co‑operation between TE Offices and municipal services.

While some individual municipalities reported positive results, the overall national employment effects remained modest during the pilot period. The evaluation did not identify a clear, statistically significant impact on employment rates when compared to non-pilot areas. Still, the report highlights that the full effects may not yet be visible, given the reform's short timeframe and the time it takes for service improvements to translate into measurable labour market outcomes.

Despite these limitations, the pilots generated valuable lessons for future employment policy reform. Municipalities developed new working methods, strengthened employer engagement, and demonstrated the potential of local-level co‑ordination in responding to diverse jobseeker needs. The experience also emphasised the need for clearer governance structures, stable funding, and better-aligned national IT systems if the decentralised model is to be scaled up effectively.

In conclusion, the evaluation underscores that municipal employment services have potential, particularly in improving service integration and responsiveness. However, realising this potential across the country will require stronger support mechanisms, investment in municipal capabilities, and a longer-term commitment to evaluation and system development.

Conclusions and lessons learned from Finland’s previous regional-level experiments

During the past 25 years and beyond, Finland has actively experimented with decentralised governance, targeted regional incentives, and service integration models to address persistent challenges in its regional development landscape. These experiments - ranging from tax relief schemes and regional self-government to municipal employment service delivery - have not always produced the transformative results originally hoped for. Yet taken together, they offer an unparalleled set of lessons about what it takes to innovate in public governance and deliver impact in complex territorial systems.

Improved service integration, limited fiscal impact

One of the clearest successes of regional and municipal governance reforms has been the integration of services - particularly in health, social care, and employment support. Initiatives like the Kainuu self-government experiment and the municipal employment service pilots improved co‑ordination between fragmented service providers and enabled more holistic approaches to client needs.

However, these gains in administrative coherence did not consistently translate into cost savings. In Kainuu, while administrative overhead fell, healthcare costs rose slightly. Similarly, the employment pilots facilitated better cross-sectoral working but did not yield significant labour market improvements at the national level. These outcomes illustrate a central tension in decentralised governance: integration may improve quality and access, but not necessarily reduce expenditure.

Financial incentives alone are insufficient

The evaluations of accelerated depreciation and payroll tax relief schemes showed that targeted financial incentives had little impact on firm behaviour, even in disadvantaged regions. These policies failed to overcome structural barriers to investment and employment - such as remoteness, limited labour supply, or weak local demand. The findings underscore a widely confirmed principle in regional policy: reducing business costs, on its own, is not enough to reverse economic decline.

Local capacity shapes outcomes

The success of decentralised service delivery depends heavily on the institutional capacity of municipalities or regions. Where municipal governments had prior experience, resources, and established networks, they were better able to leverage new responsibilities. Where capacity was weak, the same reforms struggled to gain traction. This suggests that decentralisation must be accompanied by targeted support for governance, staffing, and technical infrastructure, or it risks widening regional disparities.

Digital infrastructure is a foundational requirement

Across experiments, fragmented digital systems and data access limitations repeatedly emerged as critical barriers. Municipalities in the employment pilots, for instance, struggled to access state-held data on jobseekers, undermining their ability to deliver targeted services. These issues highlight the urgent need for interoperable digital platforms and integrated data governance frameworks to support multi-level co‑operation.

Democratic legitimacy cannot be assumed

While the creation of new democratic institutions - like Kainuu’s directly elected regional council - was administratively bold, it lacked deep public engagement. Turnout in regional elections was low, and awareness of the governance changes remained limited. This experience shows that new governance structures require active efforts to build legitimacy, communicate their purpose, and involve citizens in shaping their outcomes.

Policy innovation takes time - and learning

One of the most distinctive aspects of the Finnish approach has been its commitment to piloting reforms rigorously before national adoption. Rather than scaling prematurely, Finland has treated experiments as structured learning exercises. Although few pilots were extended in their original form, their cumulative impact on institutional learning has been substantial. The results informed two of the country’s most ambitious structural reforms: the 2023 social and healthcare (SOTE) reform, and the 2025 transfer of employment services to municipalities.

This model of “evidence-first” experimental governance is increasingly rare internationally - and positions Finland as a policy laboratory admired by peers across the Nordic region and beyond. It demonstrates that governance innovation is not just about clever policy design, but also about sustained political commitment, realistic expectations, transparent evaluation, and the institutional discipline to learn from failure.

As Finland continues to reshape its regional development and welfare governance frameworks, these lessons point to several priorities:

• Ensure decentralisation is matched with institutional support, especially for small or structurally disadvantaged municipalities.

• Use targeted incentives only as part of broader packages that also address infrastructure, skills, connectivity, and innovation.

• Invest in digital and data systems that enable real-time collaboration and accountability across governance levels.

• Embed experiments in a long-term learning cycle, with sufficient time to evaluate impacts and adjust models accordingly.

• Build democratic legitimacy and public trust into every major reform, recognising that governance innovation must be visible, understandable, and responsive to citizens.

In conclusion, Finland’s regional pilot experiments have not only provided technical insights into what works in service delivery and incentive design - they have also modelled a mature, disciplined approach to public innovation. While few of the pilots resulted in direct, permanent policy shifts, their legacy lies in having shaped the conditions for Finland’s most significant recent reforms. The cumulative experience underscores that strategic experimentation, when coupled with institutional readiness and political will, can build lasting foundations for smarter and more resilient governance.

Managing organisation, impact evaluation and implementation risks

While these pilots offer promising avenues for addressing the region’s challenges, it is important to acknowledge the evaluation and implementation risks that accompany their simultaneous rollout. Pilots launched in multiple regions at once may reduce the availability of suitable control groups for comparison. To mitigate this, pilots should be phased when feasible, and rigorous baseline assessments should be conducted. Methodological discipline would be key, ensuring that each pilot yields lessons that can guide future policy decisions.

All pilot projects would adhere to a shared implementation framework to ensure strategic coherence and allow for effective monitoring. The framework includes four essential stages: careful preparation and baseline analysis, inclusive implementation in collaboration with stakeholders, continuous monitoring supported by KPI-driven management, and structured dissemination of lessons learned to inform national and EU-level policy processes.

To co‑ordinate efforts and promote synergies across regions, all pilots could be overseen by the proposed Joint Co‑ordinating Body (JCB). This mechanism, recommended in the Recommendations Chapter, would strengthen strategic co‑ordination, knowledge sharing, and innovation across the eight regions. The JCB would not only facilitate the governance of individual pilot projects but also serve as a platform for cross-regional dialogue, shared learning, and policy experimentation. Through its co‑ordination role, the JCB could support the replication and scaling of successful approaches, helping to build a common regional transition framework and strengthening the broader innovation ecosystem.

At the same time, it is essential to recognise and manage key risks and trade-offs that may emerge during implementation.

Risk of regional inequality

One of the core goals of the suggested pilot programmes is to strengthen territorial cohesion by providing tailored support to structurally disadvantaged regions. However, there is a risk that some regions may benefit disproportionately from the pilots due to stronger existing institutional capacities, more mature industrial ecosystems, or greater political visibility. Without careful calibration, this could reinforce rather than reduce existing intra-regional disparities. To mitigate this, the pilot selection processes must apply transparent and evidence-based criteria, ensure equitable access to resources, and include mechanisms to support capacity-building in less advanced areas.

Opportunity costs and resource trade-offs

Piloting innovative interventions inevitably requires financial and human resources that could otherwise be allocated to ongoing programmes. This creates potential opportunity costs, particularly in a constrained fiscal environment. For example, dedicating infrastructure or RDI funding to a targeted pilot zone may limit the availability of support for other regions or sectors. Moreover, the administrative attention required for pilot governance may divert efforts from mainstream service delivery. These trade-offs must be weighed carefully, and decisions should be informed by robust cost-benefit and risk assessments. Where possible, pilot financing should leverage new or complementary funding streams, such as EU programmes or dedicated innovation funds, to avoid displacing core regional development spending.

Administrative capacity constraints

Effective implementation of the pilots depends on the ability of local and regional actors to co‑ordinate, manage, and evaluate complex projects. However, administrative capacity varies across municipalities and across regions in eastern and southeastern Finland. Smaller municipalities or regions in particular may face challenges in providing co-financing, recruiting specialised staff, or fulfilling demanding reporting requirements. This could create uneven implementation outcomes or place undue strain on local governance structures. To address this, national authorities and regional councils should offer targeted technical assistance and facilitate shared service models where appropriate. In addition, regions themselves could collaborate to pool resources, exchange expertise, and jointly build administrative capacity. Inter-regional co‑operation could play a particularly important role in reducing duplication, achieving scale in training and evaluation, and ensuring a more equitable distribution of implementation capacity across the territory. Pilot governance arrangements should also be scaled to reflect local capacities, with differentiated responsibilities and flexible support mechanisms.

References

[5] Aho, S. et al. (2024), Työllisyyden kuntakokeilujen arviointi, https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/165412/VNTEAS_2024_3.pdf?sequence=1&isAllowed=y (accessed on 6 June 2025).

[1] Grönberg, S. and T. Kosonen (2011), Kehitysalueiden korotettujen poistojen vaikuttavuus Muistiot 18.

[4] Hämäläinen, K. and A. Moisio (2015), One or Two Tiers of Local Government?-The Cost Effects of a Regional Experiment, VATT, http://www.doria.fi/handle/10024/148723.

[2] Korkeamäki, O. (2011), Lapin ja Kainuun sosiaaliturvamaksuvapautuksen vaikutus yritysten työllisyyteen, palkkoihin ja kannattavuuteen, https://www.doria.fi/handle/10024/148700 (accessed on 6 June 2025).

[3] Ministry of Finance (2013), Kainuun hallinto-kokeilun päätty-minen Hallinnon kehittäminen 5/2013 Seuranta-sihteeristön loppuraportti, https://api.hankeikkuna.fi/asiakirjat/94e05b3b-d9e0-4c26-9f4d-46e3f1643675/ccb4a496-7f97-4726-b216-4fe3653d0a9a/JULKAISU_20130227123638.pdf (accessed on 6 June 2025).

Notes

← 1.  For more detailed description of the suggested piloting phases, please also see the subsection below titled as “Implementation roadmap for pilot projects in Finland’s eastern and southeastern regions”.

← 2.  Infrastructure needs such as grid bottlenecks, transport accessibility and secure broadband networks are analysed in detail in the diagnostic and recommendations chapters of this report.

← 3.  In this piloting case, more than one region could together form the pilot area.

← 4.  It should be noted that Finnvera recently implemented a loan pilot targeted at micro-enterprises, which ran from October 2024 to March 2025. The pilot proposal presented in this report suggests focusing on a distinct target group - SMEs in eastern and southeastern Finland affected by the loss of Russian markets and supply chain disruptions. Its regional focus, combined with specific recovery objectives and a built-in monitoring component, would avoid overlap with previous pilots, add value and complement earlier initiatives.

← 5.  The kehitysaluepoisto (accelerated depreciation scheme for development areas) was applied in geographically designated regions classified as kehitysalueet (development areas) in Finland. These classifications were based on national regional policy criteria, including economic disadvantage, remoteness, or depopulation trends.