European clusters provide lessons for New Zealand

Finland part 3: COLIN JAMES says NZ must look north for answers.

Clusters are Michael Porter's recipe for economic success. "Positive externalities" develop from interaction among companies in or connected to an industry, especially if there is a demanding domestic customer base and fierce competition in the industry. This gives the companies in the cluster an international competitive advantage.

Professor Porter produced a report early this decade and updated it last year. The original report offered rugby (then actually under serious threat, from which it escaped only in the nick of time by going professional) as an example. Yachts were a more convincing example. But actually we remain largely an "extractive" economy, as Environment and Crown Research Institutes Minister Simon Upton told the National Party conference on 11 July in a speech on national identity.

That is, we grow trees, cut them down and process them to a limited extent on machinery made by companies in some other country. Which country? Little Finland dominates the market. The forest industry in Finland does grow trees, cut them down and process them into pulp, paper, paperboard and sawn wood.

But along the way this country with only 1.4 million more people than us, has spawned the world's leading maker of paper machines, many supporting and related industries and world-class project management and engineering skills exportable via consultancies and "an efficient energy system, world-class research and forest management and harvesting abilities", to quote ETLA (the independent Research Institute of the Finnish Economy).

Finns were imported to run the first major pulp and paper plant at Kawerau in the 1950s. But before you start drawing unfavourable comparisons, note this comment in a study of Finnish industry by ETLA: "In the early 1990s the open sector ... proved too small to support the previous standard of living and continuous growth. Finland simply had too few successful firms and industries.

"Policies used earlier to promote industrial activity [state investment and subsidies] were inappropriate in the new, more global and less restricted, environment. Therefore, it was necessary to ... redefine the role of industrial policy." You will recognise the symptoms from our own history. But the parallels cannot be tightly drawn. The early 1990s were a time of crisis for Finland with the simultaneous collapse of the Soviet Union, which had been taking 15-20 per cent of exports, and bursting of a financial bubble.

The industry policy redefinition abandoned the former heavy state involvement in investment and heavily cut subsidies in favour of improving markets, lowering the tax burden, enhancing technological development, promoting small and medium enterprises (SMEs) and backing multilateral free trade initiatives. Industrial subsidies are now the lowest in the European Union and confined to shipbuilding and the EU's own regional and other development subsidies.

This happened to coincide with the developmental state of Finnish industry. The ETLA study says Finland decades ago left behind the "factor-driven" stage of development, in which technology and management skills were imported to exploit natural resources and New Zealanders will recognise this from the recent past a "fairly high standard of living can be achieved" but "maintaining it in the long run is unlikely".

Finland has also long since moved beyond the next stage, "investment-driven", characterised by aggressive investment of imported technology into a limited number of industries, economies of scale and active Government support. By the early 1980s, the country was moving into the "innovation-driven" stage, in which firms innovate themselves, compete fiercely and operate on the global stage.

The ETLA study was to discover whether Finnish industry has what it takes to flourish in the global economy. The forest industry does, despite the "severe disadvantage of being located in the far north, a slow-growth climate and rapidly escalating labour costs (nearly tripled during the 1990s)". Its technology sees to that, ETLA says.

More important is the rapidly developing telecommunications industry, headed by Nokia. ETLA sees that surpassing the forest industry in size during the next decade. Underpinning all the industries is education, which is free even at university and which ETLA assesses as of high quality, with long study times, emphasis on engineering and natural sciences and a considerable increase in research training in the 1990s - though education officials told me they were still falling short of their hoped-for levels of science graduates.

There is another underpinning membership of the European Union. This is not just a matter of better access to a huge nearby market, a boon New Zealand can only dream about, Apec or no Apec. ETLA also sees clusters as not confined by national borders. Finnish companies benefit from interaction with counterparts elsewhere in the EU. The EU also supplies funds for regional development and other economic development programmes.

* Tomorrow: What has Finland got for us?