Abstract
This article documents and explains the surprising capacity of several Continental European countries to adapt to rapid, innovation-based competition. Critics and proponents alike suggest that these economies rely on incremental upmarket movement in low- and medium-technology industries. Several historically low-technology Nordic countries, however, have recently assumed leading positions in industries such as biotechnology, software, and telecommunications. The article resolves this puzzle by arguing that these countries have adapted institutionalized cooperation among organized economic actors to invest in new supply-side resources, including venture capital, skill formation, and research. This pattern of “creative corporatism” has very different implications for economic adjustment, facilitating movement into new high-technology industries. The article supports the argument by analyzing institutional change and economic restructuring in Finland, a critical case where high-technology competition is least likely. The article documents similar developments in Denmark and Sweden, situating all three cases in relation to literature on comparative political economy.
This article documents and explains the surprising capacity of a number of European economies to compete in new high-technology industries. Recent literature in comparative political economy suggests that European economies should struggle in this space. Liberal critics contend that institutionalized cooperation among organized economic actors inhibits the redistribution of resources to new industries (Alesina & Giavazzi, 2006). Even proponents concede that this pattern of “neo-corporatism” is most effective in modernizing stable, low- and medium-technology industries (Eichengreen, 2006; Hall & Soskice, 2001; Katzenstein, 1985; Lundvall, 2002). Neither account leaves much room for rapid, innovation-based competition. Yet a number of ostensibly slow-moving neo-corporatist economies such as Denmark, Finland, and Sweden have assumed leadership in a range of new high-technology industries, including biotechnology, software, and telecommunications equipment.
This article resolves this puzzle by arguing that neo-corporatism, or institutionalized cooperation among organized economic actors, can advance multiple objectives. Although traditional literature on neo-corporatism and more recent work on the “varieties of capitalism” suggests that institutionalized cooperation performs “conservative” functions, protecting and upgrading established investments (Hall & Soskice, 2001; Katzenstein, 1985), recent research on “competitive” corporatism suggests that countries facing disruptive shocks can adapt neo-corporatism to facilitate market-oriented reform (Ebbinghaus & Hassel, 2000; Rhodes, 2001). This article identifies a third strategy, as economies with a strong tradition of cooperation in production convert coordination to invest in new supply-side resources such as venture capital, human capital, and research. These “creative” corporatist deals have unique implications for adjustment, mobilizing resources around new firms in knowledge-intensive high-technology industries. In linking new patterns of neo-corporatism to high-technology competition, this article not only identifies an enduring role for institutionalized cooperation but also illuminates a hitherto neglected source of dynamism in densely organized economies.
The article does so in five steps. It begins with the puzzle, revealing that some historically incremental, low-technology, neo-corporatist economies have assumed leadership in new high-technology industries. The second section resolves that puzzle by distinguishing among conservative, competitive, and creative corporatism. The third section supports the argument by focusing on Finland, a critical case where high-technology competition was least likely. The fourth section generalizes the argument by identifying similar shifts in Denmark and Sweden. The article concludes by discussing prospects for creative corporatist reform in other European states. Empirical analysis is based on 240 interviews conducted with policy makers, trade union leaders, and industry representatives in Denmark, Finland, and Sweden.
The Puzzle: When Slow-Moving Economies Compete in Fast-Moving Industries
Historically, Continental European countries relied on a distinctive pattern of cooperation among state and societal actors to manage economic adjustment. This essay uses the term neo-corporatism to capture this process of institutionalized cooperation among organized economic actors. In contrast to liberal market economies, societal actors are “organized” into producer associations, specifically trade unions and industry associations. These actors engage in “institutionalized cooperation” or repeated, long-term interaction with each other and state agencies at the national, sectoral, and firm levels. Historically, cooperation in policy formulation and production was perceived to support incremental upmarket movement within stable, low- and medium-technology niches, mobilizing resources around established enterprises, employees, and industries (Eichengreen, 2006; Hall & Soskice, 2001; Katzenstein, 1985; Lundvall, 2002). The Nordic countries exemplified this pattern of adjustment, relying on institutionalized cooperation to upgrade established industries such as forestry and transportation equipment (Rehn, 1996; Sölvell, Zander, & Porter, 1991; Steinbock, 1998).
New information and communication technologies threaten this postwar formula. The ability to codify and transmit information represents an important source of growth and innovation, and in so doing reduces barriers to entry in hitherto stable, low-technology niches (Schulze-Cleven, Watson, & Zysman, 2007). Scholars contend that liberal economies are best positioned to grapple with these disruptive developments. Decentralized equity markets and limited labor market regulations accelerate the redistribution of capital and labor from vulnerable firms to entrepreneurial agents (Hall & Soskice, 2001, pp. 38-41). Neo-corporatist economies, by contrast, are relegated to vulnerable low- and medium-technology niches, suffering slower growth and higher unemployment (Alesina & Giavazzi, 2006).
Of interest, however, several neo-corporatist economies have thrived in this environment. Finland has emerged as an unlikely leader in mobile communications (Hirvonen, 2004), Sweden boasts an even broader range of activities, including a wave of software start-ups (Augustsson, 2005), and Denmark hosts a large cluster of small and medium-sized biotechnology firms, as well as a dynamic collection of multinational subsidiaries in software and telecommunications (Christensen, Gregersen, Johnson, Lundvall, & Tomlinson, 2008). Table 1 supports these claims by documenting high-technology competition in nine wealthy EU states. The table uses data from Hall and Gingerich (2009) to rank the countries from most to least neo-corporatist and data from Eurostat (2011) to document high-technology performance.
High-Technology Competition in Nine European States.
EPO = European Patent Office.
Table 1 challenges arguments that liberal economies dominate high- technology markets. Although some neo-corporatist economies such as Austria, Belgium, and Germany struggle in this space, others have assumed a more competitive position. Finland, for example, exceeds Britain, a liberal market economy, in high-technology manufactured exports and employment. Other measures are even more impressive. Finland and Sweden dominate in per capita high-technology patenting and high-technology patents as a share of all patents (Eurostat, 2011). Meanwhile, Denmark ranks alongside Finland and Sweden in high-technology services employment. Denmark, Finland, and Sweden not only are competing in high-technology markets but appear to surpass their rivals in measures of knowledge-intensive high-technology competition.
Existing literature on high-technology competition yields little insight into Danish, Finnish, and Swedish success. Some scholars contend that large economies such as Britain and Germany occupy a privileged position in high-technology markets because they can rely on large domestic markets to set standards and recoup research costs (Lundvall, 2002, p. 37). Denmark, Finland, and Sweden, however, are all small states. Others focus on geopolitics, linking high-technology competition to military expenditure or ties to a military superpower (Taylor, 2004). This could explain high-technology performance in countries such as the United States, Israel, and Ireland. Denmark and Finland, however, have diminutive military budgets, and none of the Nordic countries enjoy an unusually close relationship with the United States. This article thus seeks to explain high-technology competition in the absence of lucrative defense contracts or significant technology transfer.
Some experts suggest that neo-corporatist economies can compete in high-technology industries by identifying gradually evolving niches with high barriers to entry (Casper, Lehrer, & Soskice, 1999). Finnish firms, however, compete in the notoriously fickle market for mobile handsets, and Swedish software entrepreneurs established a bridgehead in the highly unstable market for middleware. Analysts have tried to resolve this puzzle by pointing to large, century-old high-technology multinationals such as Philips and Ericsson (Casper & Whitley, 2004). Finland, however, relied on forestry and mining conglomerates before becoming a telecommunications leader, and Denmark’s medium-sized pharmaceutical multinationals do not explain its status as a research center in software and mobile communications.
As a result, many scholars conclude that the neo-corporatist economies in question can compete in high-technology markets only by becoming less neo-corporatist. Denmark, Finland, and Sweden each abandoned core neo-corporatist deals including bank-based patient capital, centralized collective wage bargaining, and traditional industrial policies (Green-Pedersen, 2002; Rehn, 1996; Steinbock, 1998). Yet liberal explanations do not resolve this puzzle either. As described below, Denmark, Finland, and Sweden witnessed increasing cooperation in each of these areas, engaging industry associations in industrial policy, trade unions in labor markets, and jointly administered pension funds in finance. Far from inhibiting adjustment, institutionalized cooperation among these organized actors supported unprecedented movement into new, high-technology industries. The following section explores this counterintuitive reliance on neo-corporatism and its surprisingly successful impact on high-technology competition.
The Argument: Creative Corporatism and High-Tech Competition
This article resolves this puzzle by arguing that neo-corporatism can perform very different functions and has in fact changed over time. More specifically, it distinguishes among three types of neo-corporatism. Each engages trade unions and industry associations in peak and local-level cooperation. Organized actors, however, cooperate over different content. Stated most concisely, traditional or “conservative” corporatism relies on patient capital, social protection, and state aid to protect and upgrade established actors and activities. Competitive corporatism uses fiscal retrenchment and market-oriented reform to redistribute resources. Finally, creative corporatism targets new supply-side resources such as risk capital, skill formation, and research, facilitating movement into new, knowledge-intensive industries. Table 2 briefly summarizes content in three policy domains, financial markets, labor markets and industrial policy, which govern the allocation of capital, labor and knowledge respectively. The rest of the section extends the analysis, characterizing each subtype and its consequences for adjustment.
Conservative, Competitive, and Creative Corporatism.
Conservative Corporatism
Historically, neo-corporatist institutions performed “conservative” functions in the sense that they protected or upgraded established actors and activities. Early literature viewed neo-corporatism as a mechanism for managing distributive conflict during the turbulent 1970s. For example, neo-corporatism was perceived to ensure a socially acceptable rate of change by compensating vulnerable firms and their employees (Katzenstein, 1985, p. 26). More recent firm-centric literature on the varieties of capitalism suggests that these conservative deals perform a valuable economic function, encouraging firms to invest in expensive equipment and employees to cultivate specialized skills (Hall & Soskice, 2001, p. 22). Protective bargains both insure risky, long-term investments and provide the tools to upgrade those investments over time.
Two distinct literatures on institutionalized cooperation thus emphasize strikingly similar content. In labor markets, trade unions restrained wages for countercyclical fiscal policies (Cameron, 1984, p. 170). More recent literature places less emphasis on centralized wage formation and fiscal policy, but continues to focus on employment protections, unemployment benefits, and other social protections (Estevez-Abe, Iversen, & Soskice, 2001, p. 154). In financial markets, traditional and recent research emphasizes large banks and their role in providing patient capital. Banks extend long-term loans, subsidize loss-making enterprises, and organize price-fixing cartels to modernize and upgrade existing clients (Hall & Soskice, 2001, p. 22; Shonfield, 1965, chap. 11). Finally, industrial policy represents a public-sector analogue to patient capital, extending sector- and firm-specific aid to troubled firms and industries (Katzenstein, 1985, pp. 66-67).
Although the precise combination of patient capital, social protections, and state aid varies, these deals have strikingly similar implications for economic adjustment. Patient capital enables firms to invest in productivity-enhancing capital equipment and upgrade investments in hard times (Hall & Soskice, 2001, p. 22). Defensive industrial policies enable banks to provide patient capital by insuring and modernizing large, long-term investments (Lilja & Tainio, 1996, p. 160). Finally, patient capital, state aid, and social protections incentivize firms and workers alike to develop specialized skills (Estevez-Abe et al., 2001, p. 154). Each of these deals is highly competitive in its ability to construct, defend, and upgrade stable niches. The literature thus explains postwar Nordic success in low- and medium-technology niches and illuminates contemporary developments in Continental economies such as Austria and Germany.
At the same time, this literature does not explain how stable, low- and medium-technology economies respond to disruptive shocks. In fact, it suggests that they do not. Patient capital discriminates against new growth-oriented reforms, social protections discourage labor market mobility and defensive industrial policies delay economic restructuring (Eichengreen, 2006, chap. 9). These policies are in turn embedded within fragmented, proportional, and veto-prone political systems to more credibly insure asset-specific investments (Cusack, Iversen, & Soskice, 2007; Hall & Soskice, 2001). To understand how the Nordic countries redistributed resources, we must shift attention from coordination in production to policy reform.
Competitive Corporatism
Recent literature on policy concertation and so-called “competitive corporatism” in particular suggests that European countries can adapt institutionalized cooperation to perform different functions. Adaptation occurs when policy makers, often “hardened” by EU restrictions, credibly threaten to bypass societal actors, unilaterally implementing cost-competitive and market-friendly reforms (Rhodes, 2001, p. 177). At the same time, policy makers, particularly those in multiparty systems, have incentives to share responsibility for controversial reforms with societal actors, mainly trade unions, which are most likely to oppose and punish policy makers for engaging in unilateral reform. To the extent that policy makers can credibly threaten trade unions, the latter support market reform in exchange for influence over its content (Baccaro & Simoni, 2008; Ebbinghaus & Hassel, 2000). Employers are less central to the analysis but ratify agreements to secure wage restraint, macroeconomic stability, and regulatory reform. This pattern of interaction between weak governments and strong but vulnerable trade unions yields competitive corporatism, in which institutionalized cooperation is used to expand rather than limit market competition (Rhodes, 2001, pp. 180-181).
This strong market orientation is reflected the content of negotiations. In the labor market, the literature emphasizes wage restraint and links collective wage agreements to (negotiated) fiscal retrenchment, social benefit reductions, and labor market deregulation (Ebbinghaus & Hassel, 2000; Hardiman, 2002; Rhodes, 2001, pp. 180-181). Although the literature on competitive corporatism focuses on the labor market, one can generalize the argument to other policy domains. For example, fiscal retrenchment limits the scope for defensive industrial policies and the use of the state as an “employer of last resort.” Competitive corporatism can also be extended to financial markets, as countries such as Ireland linked tripartite bargaining to corporate tax competition and personal income tax reductions (Hardiman, 2002, pp. 19-20).
These competitive corporatist deals have very different implications for economic adjustment. For example, increasing market competitive facilitates the redistribution of resources to new actors and emerging industries. Competitive corporatist stabilized crisis-ridden economies throughout Europe, from the Netherlands and Ireland in the 1980s to Italy, Spain, and Portugal in the 1990s, bolstering the first two countries’ positions in high-technology markets (Rhodes, 2001, pp. 181-193). At the same time, the literature yields surprisingly little insight into how countries with a tradition of strategic coordination respond to disruptive shocks. Closer attention to employer preferences reveals that firms are willing to strike different policy trade-offs when embedded in interfirm, industry–labor, and private–public networks in production.
Creative Corporatism
More specifically, countries with a history of coordination in production can adapt institutionalized cooperation to increase investment in new supply-side resources. Superficially, political dynamics are similar to competitive corporatism. As the literature on concertation suggests, reform occurs when weak policy makers credibly threaten a strong but vulnerable trade union movement. Organized labor naturally embraces an investment-oriented strategy, not only as an alternative to market-oriented reform but also because it enables them to assume a more active role in policy implementation. Industry preferences, however, are less straightforward. The creative corporatist deals described above require firms to provide sensitive information about not only policy preferences but also their capital requirements, skill profiles, and product portfolios. Firms are more likely to embrace and engage collaborative initiatives when they have a history of sharing information and resources with policy makers, labor, and other firms.
As a result, countries with a strong tradition of cooperation can respond to disruptive economic shocks by turning to creative corporatism, or institutionalized cooperation in the construction of new supply-side resources. Resources are “new” in the sense that investments are decoupled from traditional defensive deals and targeted toward new actors, activities, and industries. Corporatism is thus “creative” in its dual commitment to creating high-quality inputs and a Schumpeterian process of creative destruction. Creative corporatism can be identified by distinctive patterns of cooperation in financial markets, labor markets, and industrial policy. In financial markets, creative corporatism is characterized by limited recourse to patient capital in late-stage finance but increasing cooperation in early-stage finance. More specifically, creative corporatism engages industry and labor-managed pension funds in venture capital markets. In labor markets, creative corporatism is characterized by less emphasis on employment protection and greater collaboration in skill formation, particularly as it relates to noncore employees. Finally, creative corporatism places less emphasis on state aid and state-owned enterprises but is characterized by greater peak-level, private–public, and interfirm cooperation in research.
Creative corporatist deals in financial markets, labor markets, and industrial policy have very different implications for economic adjustment, redistributing resources to new enterprises, activities, and industries, respectively. The emphasis on high-quality inputs in turn permits movement into the more knowledge-intensive activities described in Table 1. Table 3 offers preliminary evidence to support this argument, using data from Eurostat (2011) to demonstrate that Denmark, Finland, and Sweden invested more aggressively in venture capital, skill formation, and research than did conservative corporatist countries such as Austria, Belgium, and Germany, competitive corporatist countries such as Ireland, and even liberal countries such as Britain.
Investment in Risk Capital, Skills, and Research in Nine European States.
The following two sections complete the analysis, tracing the link from new patterns of collaboration to investment in new resources and high-technology competition. Each section begins by demonstrating that (in contrast to other outliers such as Germany and the United Kingdom) Denmark, Finland, and Sweden historically invested very little in these resources. These countries instead relied on conservative corporatism, using patient capital, social protections, and state aid to upgrade low- and medium-technology niches until the 1980s. Deteriorating economic and political circumstances enabled policy makers and employers to credibly threaten to implement market-oriented reforms. Organized labor’s ability to resist, however, led policy makers and employers to strike creative corporatist deals beginning in the early 1980s and continuing into the 1990s. Peak-level agreements and local collaboration dramatically increased investment in new supply-side resources, which in turn enabled firms to enter new industries such as biotechnology, software, and telecommunications equipment. Analysis begins with Finland, a “critical” case (Eckstein, 1975) where high-technology competition was least likely.
The Evidence: Creative Corporatism and High-Tech Competition in Finland
Finland represents perhaps the most counterintuitive example of high- technology competition in Northern Europe. The country relied on pulp, paper, metal, and related engineering products to support economic prosperity 25 years ago. At 3.6% in 1980, the share of high-technology exports was among the lowest in Western Europe. By 2005, the share of high-technology manufactured exports had more than quadrupled to 22% and Finland ranked first in the EU in per capita high-technology patenting and high-technology patenting intensity (Eurostat, 2011). The Finnish case is puzzling because it defies explanations based on state size, military expenditure, geopolitical ties, inherited comparative advantage, and niche-based competition. Although it is important to recognize that Finnish firms benefited from idiosyncratic factors such as the Nordic Mobile Telephone standard of the 1980s (Beise, 2004), this explanation does not explain how Finnish firms such as Nokia capitalized on favorable opportunities, outmaneuvering other countries (Norway) and companies (Motorola Denmark) that could access the same standard. Nor does this account explain success in other high-technology industries such as data security (F-Secure) or medical instruments (Instrumentarium), where firms could not rely on advanced, pan-Nordic standards.
Conservative Corporatism and Incremental Upmarket Movement
Historically, Finland was a classic case of conservative corporatism. Large banks consolidated deposits in the late 19th century to facilitate movement into capital-intensive, resource-extractive industries such as timber, pulp, paper, and mining (Lilja & Tainio, 1996, p. 169). In exchange for issuing large, long-term loans, banks acquired a controlling stake in firms, using their influence to promote interfirm cooperation. Banks routinely redistributed revenue from more profitable enterprises to their flagship forestry firms and broadened cooperation during the interwar period to construct export and marketing cartels. By the postwar period, forest-based industry associations had extended their influence to exchange rate policy, lobbying for competitive devaluations in tough times (Lilja & Tainio, 1996, p. 151).
By this point, the state had joined the banks as a second locus of cooperation. Policy makers established state-owned enterprises in forestry, copper, steel, and refining and introduced a more comprehensive system of credit rationing through bipartite state-industry committees. Postwar tax increases were channeled back to industry at subsidized rates (Vartiainen, 1999, p. 228). Meanwhile, bilateral trade with the Soviet Union, which was organized through political channels, reinforced this pattern of tight coordination (Steinbock, 1998, p. 8). Organized labor was largely excluded from these developments, as the 1918 civil war had divided industry and labor and fragmented the latter into rival ideological blocs. Finland’s first Social Democratic-led coalition government, however, unified the Social Democratic wing of the trade union movement and reached a tripartite incomes agreement with employers in 1968. Subsequent governments broadened Finnish neo-corporatism, extending new social protections during the 1970s and introducing a full employment guarantee in 1987 (Kauppinen, 2001).
Collectively, these financial, industrial policy, and labor market deals supported gradual upmarket movement in low-technology industries. Universal banks defended their flagship firms by redistributing revenue across their holdings, whereas credit-rationing and competitive devaluations favored capital-intensive and resource-extractive industries. At the same time, these institutions inhibited the development of new, growth-oriented firms. Paper and related forest products accounted for more than half of Finnish exports. Although Finland diversified into other industries, restructuring reflected movement into medium-technology metal extraction, processing, and related engineering industries. Furthermore, many of those products went to the Soviet Union, which absorbed a quarter of Finnish exports during the early 1980s (Steinbock, 1998, p. 8).
Finland’s failure to diversify into new industries and its growing dependence on the Soviet Union was perceived as a geopolitical threat, prompting policy makers to deregulate financial markets and abandon traditional industrial policies from 1983 onward (Moen & Lilja, 2005, p. 367). The collapse of the Soviet Union in 1991 and the resulting economic crisis precipitated even further-reaching reforms as contemporaries blamed conservative corporatist institutions for encouraging excessive investment in established, capital-intensive, low-technology industries and inhibiting the redistribution of resources to new enterprises (Pohjola, 1996, p. 10). A newly elected center-right government responded with radical proposals. The government weakened the universal bank, already reeling from the crisis, with shareholder-friendly financial reforms, privatized state-owned enterprises, and proposed reforming union-administered unemployment benefits (Rehn, 1996, p. 258). Industry, which had lobbied for financial liberalization during the 1980s, withdrew from collective wage bargaining (Kauppinen, 2001, p. 46). By the early 1990s, Finnish neo-corporatism appeared dead, as policy makers and employers abandoned patient capital, social protections, and traditional industrial policies.
From Conservative Corporatism to Creative Corporatism
Rather than marking the death of Finnish neo-corporatism, however, the 1990s witnessed the most comprehensive and centralized collective wage agreement in Finnish history (Rehn, 1996, p. 268). Although strengthened by political and economic crisis, unilateral reform proved costly. The center-right government, for example, retreated from controversial social insurance reform proposals after trade unions threatened to launch a general strike on two occasions and suffered a decisive defeat at the ballot box in 1995 (Kauppinen, 2001, p. 58). As a result, governments (even the center-right government of the early 1990s) sought to diffuse responsibility by negotiating with labor representatives.
Finnish trade unions negotiated from a position of weakness, particularly during the 1990s as unemployment approached 20% and the center-right government threatened to reform the union-administered unemployment benefits that sustained trade union membership in Finland. Negotiated adaptation was preferable to the credible threat of catastrophic unilateral reform. A “creative” investment-oriented approach was more attractive still, as an alternative to market-oriented reform. Indeed, one trade union representative and veteran of the early 1990s remarked that Finnish innovation policies, particularly investments in research, successfully deflected attention away from unemployment benefits (interview with Finnish trade union director, October 21, 2005).
Employers accepted creative corporatism for two reasons. First, liberalization, including the decentralization of collective wage bargaining, failed to achieve employer objectives such as a wage moderation and industrial peace (Kauppinen, 2001, p. 58). Second, and more important, employer preferences were different after a century of constructive collaboration with state agencies, banking blocs, and price-fixing cartels. Indeed, the same firms that lobbied for the privatization of state-owned enterprises and financial liberalization during the 1980s embraced ambitious new initiatives in research and development. Nokia, heavily dependent on bilateral trade with the Soviet Union at the beginning of the decade, was one of the earliest and most enthusiastic supporters of new technology policies. Furthermore, Nokia CEO Kari Kairamo leveraged neo-corporatist networks to sell the new policy, using his position as chairman of the Confederation of Finnish Employers to mobilize broad industry support for new technology policies (Moen & Lilja, 2005, p. 372).
Creative corporatist reforms were earliest and most dramatic in industrial policy, where policy makers could leverage a strong tradition of interfirm and private–public cooperation. The shift occurred as early as 1983, as the government proposed shifting from firm-specific credit rationing, investment grants, and nationalization to horizontal support for research and development (Rehn, 1996, p. 288). Although this was proposed by parliament and implemented by a new state agency, Tekes, industry representatives were intimately involved. In the words of one early director, “Even if it was a government decision, it was the shared view of industry and government. [Industry] made de facto decisions, even if the decisions were officially made in Tekes’ board” (interview with former director of Tekes, November 1, 2005). To this end, Tekes was embedded with a peak-level tripartite framework. Policy makers broadened a hitherto narrowly defined Science Policy Council between 1984 and 1987 to include new ministries, societal actors such as trade unions, and key decision makers such as the prime minister (Murto, Niemelä, & Laamanen, 2006, p. 79). The resulting Science and Technology Policy Council (STPC) played a central role in increasing public expenditure on research and development, most notably during the early 1990s (interview with former prime minister of Finland, October 6, 2005). The government doubled Tekes funding between 1990 and 1995, when virtually all other public expenditure was being cut (Murto et al., 2006, p. 96). After stagnating throughout the 1970s, public research expenditure increased from a modest 0.57% of GDP in 1983 to 0.99% of GDP by 2005, surpassing expenditure for countries such as Britain and Germany, where outlays were static or declining (Eurostat, 2011; Murto et al., 2006, p. 72).
Peak-level decisions to increase research expenditure are notable because they stimulated even more impressive increases in private-sector expenditure. Gross research expenditure as a share of GDP increased from an EU-lagging 1.32% of GDP in 1983 to 3.48%, second after Sweden, by 2005 (Eurostat, 2011). Successful implementation was predicated on the ability to adapt and exploit existing patterns of interfirm and private public cooperation. Tekes required firms to collaborate with other enterprises and public-sector actors to receive funding, effectively converting banking blocs and price-fixing cartels into research consortia (Ornston, 2006). Participants suggest that prior patterns of interaction permitted and encouraged enterprise participation. One chief technology officer remarked, “Cooperation [is] easier to establish in the sense that you know each other relatively well. And it is such that people have to perform. Your peers are watching and your reputation is on the line” (interview with chief technology officer of a Finnish electronics firm, October 19, 2005). At the individual level, joint courses on economic policy, originally designed to integrate communist trade unions, were converted to diffuse new ideas about research and innovation to labor representatives, politicians, and corporate executives (Moen & Lilja, 2005, p. 373).
Although these economic policies generated an unusually strong consensus regarding research and development, creative corporatism extended to other domains as well. During the 1990s, the STPC broadened innovation policies to cover small and medium-sized enterprises, focusing on early-stage risk capital in particular. Sitra, a foundation that administered the economic policy courses described above, entered early-stage risk capital markets as a direct investor in 1989 (Luukkonen, 2006, p. 5). It assumed an even more important role as depression-like conditions shifted attention to early-stage risk capital markets, organizing private-sector firms into an industry association in the early 1990s (Luukkonen, 2006, p. 5). The association successfully lobbied the Ministry of Trade and Industry to redistributive revenue from the privatization of state-owned enterprises into venture capital and subsequently worked with the ministry to encourage institutional investors such as pension funds and insurance companies to invest in venture capital (interview with Finnish venture capital firm director, November 20, 2006). Industry–state negotiations persuaded insurance and pension fund managers to raise their allocation to unlisted equity, with the resulting increase from 0.01% of assets in 1994 to 5% of assets by 2000, accounting for more than half of capital raised (Center for Economic and Business Research, 2001, p. 92; Luukkonen, 2006, p. 11). Early-stage venture capital investments increased from 0.007% of GDP in 1994 to 0.44% by 2005, trailing only Denmark, Sweden, and the United Kingdom (Eurostat, 2011).
Of interest, creative corporatism was more muted in labor markets, where Finland had a much weaker tradition of strategic coordination between industry and labor (Rehn, 1996). As noted above, Finnish trade unions advanced innovation policies as an alternative to labor market reform, with the result that Finland spent less (0.9% of GDP) than Denmark (1.7%) on active labor market measures and did not significantly reform social benefits (Maiväli, 2006, p. 4). Cooperation, where it did occur, revolved around the industry–state linkages described above. The STPC responded to the downturn by increasing university enrollment by 50% between 1994 and 2004, placing Finland first in the EU in the share of the population (34.2%) with a tertiary degree (Eurostat, 2011). Seats were allocated through local-level negotiations among policy makers, industry associations, and universities, doubling the number of engineering positions and tripling technician slots between 1993 and 1998 (interview with managing director of the Finnish Ministry of Education, October 28, 2005). These new investments in human capital had very different implications for economic adjustment, as described below.
Creative Corporatism and High-Tech Competition
To illustrate how creative corporatism created new opportunities for Finnish firms, this section focuses on Nokia, the country’s largest firm. The concluding paragraph establishes that restructuring was by no means limited to Nokia, but the firm’s transformation from a forest, rubber, and cable conglomerate that exported half of its output to the Soviet Union in the 1970s into the world’s largest mobile telephone producer reflects a more fundamental transformation of the Finnish economy. Like its high-technology peers, Nokia faced three challenges, experimenting with expensive new technologies during the 1980s, managing rapid growth during the 1990s, and diversifying during the 2000s.
During the 1980s, creative corporatism facilitated experimentation. Indeed, Nokia’s initial movement into radiophones and network equipment was shaped by the acquisition of a state-owned firm (Rehn, 1996, p. 307) and the firm’s close relationship to the public post and telephone operator (Berggren & Laestadius, 2003, p. 108). Industrial policies continued to shape adjustment, however, even as state-owned enterprises declined in importance. For example, tripartite research policies funded risky, long-term research in new digital telecommunication technologies during the mid-1980s. They did so as Nokia was focusing on televisions and played an even more central role in sustaining research expenditure during the downturn of the early 1990s (Ali-Yrkkö & Hermans, 2004, p. 107). National technology programs contributed to Nokia’s technological portfolio, as evidenced by the joint private–public development of a software protocol for the new digital communications standard (Ali-Yrkkö & Hermans, 2004, p. 122). They also played an indirect but even more important role in creating skilled labor. For example, Nokia ultimately acquired the public research department that developed this software protocol (interview with former project director at Nokia, November 8, 2005).
During the mid-1990s, the challenge was managing growth, as Nokia sought to expand its manufacturing capacity at an unprecedented rate and fend off an array of new competitors. Public technology programs declined in significance, from 5% of Nokia’s R&D during the early 1990s to less than 1% today (Ali-Yrkkö & Hermans, 2004, p. 107). The post and telephone operator that underwrote earlier experimentation (Berggren & Laestadius, 2003) was also privatized at this time. Creative corporatism, however, continued to play a supporting role. Nokia’s ability to increase its domestic manufacturing capacity was predicated on the rapid expansion of the Finnish university system and the negotiated implementation of conversion programs to retrain existing engineers (Häikiö, 2002, p. 119). Creative corporatist deals also mobilized other firms around Nokia. Technology programs and venture capital funds moved small and medium-sized firms into the emerging telecommunications industry. Elcoteq, a former sewing machine manufacturer, relied on public venture capital to reorient itself as a multinational telecommunication component supplier (Ali-Yrkkö, 2003). These component suppliers were integral to Nokia’s subsequent expansion. In the words of one managing director
It is good to remember that Nokia is a system house, we don’t make any components ourselves. We are bound to collaborate with many companies and we get all of the components from our suppliers. . . . During the 1990s we were using Finnish subcontracting firms to do software development, even components. . . . [Technology programs] have been very valuable in the networking. The national programs have helped us create a network. (Interview with Nokia executive officer, November 24, 2006)
From 2000, creative corporatist institutions helped firms assume new roles in telecommunications manufacturing and beyond. Nokia’s component suppliers diversified their operations, identifying other telecommunication customers and new niches, including computers and health care. Elcoteq, the former sewing machine manufacturer that internationalized alongside Nokia, emerged as Europe’s leading electronic component supplier. Nokia itself shifted from manufacturing to development and software, relying on technology programs and informal connections to cultivate a new constellation of subcontractors in design and development (Paija & Rouvinen, 2004, p. 51). Finally, research support and venture capital created space for new growth-oriented enterprises. With 11,000 employees and 1.2 billion in revenue, the Finnish software product industry rivals Ireland’s indigenous software industry, an alleged miracle, in employment and turnover (Breznitz, 2007, p. 180; Kuitunen et al., 2005, pp. 20-25).
Finland’s achievements in this sphere are particularly impressive because these calculations do not include developers who work at or supply Nokia. Finland’s ability to diversify into new activities helps explain why the information and communication technology sector’s share of total value added held steady at 10% after the dot-com crash, even as the contribution of high-technology manufacturing and Nokia itself declined (Hirvonen, 2004, p. 6). Indeed, Finnish software firms have recently received international attention for supplying Nokia’s competitors, designing the most popular gaming application for Apple’s iPhone (Wortham, 2010). Although it is less recognized, Finland has also assumed world-leading market shares in unrelated high-technology industries such as dental imaging and heart rate monitors (Helanterä & Ollus, 2004, p. 95). Instrumentarium’s transformation from a furniture company into medical device supplier closely resembled Nokia’s evolution until the firm was acquired by General Electronic in 2003 (Lovio, Jalas, & Laakso, 2003).
Generalizing the Argument: Sweden and Denmark
Recent developments in Denmark and Sweden suggest that institutional innovation and rapid restructuring were not limited to a single firm (Nokia), industry (telecommunications equipment), or country (Finland). Both countries responded to sharply deteriorating economic performance during the 1980s by adapting neo-corporatist institutions to invest in new supply-side resources. Peak-level deals and local cooperation increased investment in venture capital, skill formation, and research, facilitating movement into new high-technology markets including not only telecommunications equipment but also biotechnology and software.
Sweden: Risk Capital and Software Start-Ups
Although Swedish active labor market policies could be viewed as a precursor to creative corporatism, the country relied on conservative corporatist instruments such as patient capital to subsidize flagship firms (Rehn, 1996, p. 189). Defensive industrial policies approached 6% of GDP during the 1970s, as policy makers sought to defend established industries such as shipbuilding, steel, forestry, and textiles (Rehn, 1996, p. 196). As in Finland, these institutions rewarded mature firms operating in low- and medium-technology capital-intensive industries. During the 1980s, motor vehicles, forestry, and metals accounted for more than half of Swedish exports, whereas Sweden occupied a conspicuously weaker position in high-technology markets (Sölvell et al., 1991, p. 60). Sweden’s position in low- and medium-technology markets proved increasingly problematic as rising energy prices, rising labor costs, and new East Asian competitors challenged traditional industries (Pontusson, 1992, p. 107). Efforts to modernize ailing enterprises during the late 1970s delayed restructuring at considerable expense, trapping labor in low-productivity industries, exacerbating skill shortages and triggering wage inflation in high- productivity industries (Rehn, 1996, p. 196). Sweden’s position in high-technology markets, which revolved around Ericsson’s century-old status as a telecommunication equipment producer, declined. As in Finland, deteriorating economic circumstances pressured trade unions and Swedish neo-corporatism more generally. Universal banks were weakened by the financial crisis of the early 1990s, employers withdrew from collective wage bargaining, and the Social Democrats ceded power to a center-right coalition (Rehn, 1996, p. 189).
Instead of dismantling neo-corporatism, however, stakeholders reached new deals. The same governments that retrenched state aid during the 1980s and liquidated the wage earner funds during the 1990s introduced new research funds and technology programs (former director, Ministry of Industry, October 4, 2006). Although labor market cooperation was muted after the breakdown of collective wage bargaining, governments nonetheless expanded retraining programs and university enrollment (Augustsson, 2005, pp. 90-99). Cooperation was most robust in financial markets, where employers and employees had contributed to jointly managed pension funds since 1959 (Pontusson, 1992, p. 13). State, industry, and labor agreed to convert pension funds into risk capital investors, defending existing social insurance schemes by channeling risk capital to new enterprises. The Social Democratic government that retrenched state aid and terminated defensive industrial policies lifted the 10% ceiling on unlisted equity and engaged local governments, pension funds, and firms in a series of regional venture capital funds between 1982 and 1984 (Cetindamar & Jacobsson, 2003, p. 125). The center-right government of the early 1990s extended this strategy, redistributing money from wage earner funds to two public venture capital investors, Atle and Bure, in 1992. Its successor established a new public foundation and a new pension fund specifically dedicated to unlisted equity in 1996 (Cetindamar & Jacobsson, 2003, p. 127). Collectively, these deals propelled Sweden to the top of the EU in early-stage venture capital. Early-stage risk capital investments increased from 0.004% of GDP in 1989, less than a quarter of British levels, to 0.5% of GDP, first in the EU, by 2005 (Eurostat, 2011).
Creative corporatist adaptation created space for industrial renewal and economic growth. The share of high-technology manufactured exports increased by 50% during the 1980s and doubled in the 1990s (Bitard, Hommen, & Novikova, 2008, p. 491). Although manufactured exports contracted sharply in the dot-com crash, Sweden ranked first in the EU in high-technology services and second after Finland in high-technology patenting (see Table 1). High-technology competition was not limited to Ericsson or telecommunications. For example, thousands of software firms were established during the 1990s. The number of firms in media alone almost tripled from 600 to 1,500 between 1997 and 1999 (Augustsson, 2005, p. 113). These new software firms benefited from familiar policies. First, Sweden’s largest and most successful firms relied on a massive expansion in venture capital funding to finance their operations during the 1990s. Second, firms drew on publicly sponsored investments in human capital. The Swedish state expanded university enrollment at the beginning of the decade and reoriented adult education toward information technology in later years (Augustsson, 2005, pp. 90-99).
Denmark: Labor Market Reform and Rapid Restructuring
Denmark, like Finland and Sweden, also relied on conservative corporatist institutions throughout much of the postwar period. Coordination was less centralized in financial markets and industrial policy, as local, cooperative associations mobilized against the bank- and state-led industrial projects that characterized Sweden and Finland (Kristensen, 1992, p. 118). The cooperative movement, however, provided a robust foundation for local interfirm and employer–employee cooperation in training during the late 19th century (Lundvall, 2002, p. 191). At the turn of the 20th century, trade unions and employer associations layered national negotiations atop local ones, signing a basic agreement that exchanged trade union recognition for industrial peace (Elvander, 2002). The basic agreement would frame progressively more encompassing patterns of collective wage bargaining and, after 1933, welfare state expansion. The government mollified workers through a combination of countercyclical fiscal policies, generous unemployment benefits, and public-sector job creation in exchange for wage moderation (Johansen, 1987, pp. 156-158). As in Finland and Sweden, conservative corporatist deals encouraged actors to develop specialized skills in traditional industries including food processing and low- to medium-technology manufacturing industries such as agricultural equipment and shipbuilding (Andersen, Dalum, Linderoth, Smith, & Westergard-Nielsen, 2001, p. 42).
By the 1970s, these sectors, and the neo-corporatist deals that supported them, were in crisis. The economy was itself increasingly unbalanced as the state displaced agriculture as Denmark’s leading sector. Efforts to modernize traditional manufacturing industries by doubling state aid exacerbated Denmark’s fiscal woes, whereas the patchwork of unemployment, disability, and early retirement policies that sheltered workers limited employment, cost competitiveness, and labor force participation (Andersen et al., 2001, pp. 21-22; Bjerre, 1984). By the 1980s, economic growth had stagnated, unemployment approached 9%, and contemporaries used terms such as national bankruptcy to characterize Denmark’s fiscal and current account deficits (interview with National Bank of Denmark assistant governor, November 16, 2006). In 1982, a conservative-led coalition government was positioned to dismantle Danish neo-corporatism, slashing fiscal expenditures by 15% and suspending wage indexation (Green-Pedersen, 2002, p. 114). A center-left coalition government went even further in the 1990s, eliminating traditional industrial policies, reducing unemployment benefit duration, and attaching activation requirements (Green-Pedersen, 2002, p. 124). Danish neo-corporatism appeared as vulnerable as its Finnish and Swedish counterparts.
Rather than dismantling Danish neo-corporatism, however, stakeholders adapted institutionalized cooperation to perform new functions. The Conservative-led government of the 1980s launched an ambitious technology program from 1984 to 1989, even as it slashed public expenditure (Annerstedt, 1989, p. 18). The government and its Social Democratic–led successor also engaged pension funds and banks with two new vehicles to promote venture capital financing (Christensen, 2003). Cooperation was most extensive in labor markets, where a tradition of industry–labor coordination enabled firms and unions exchange investment in training for social benefit restructuring (Lundvall, 2002, p. 191). Industry and labor struck bilateral agreements on training as early as the 1980s, whereas the peak-level Zeuthen Commission was the first to link labor market reform to jointly administered training in 1992. The Social Democratic government built on this tripartite consensus, underwriting industry investments in training after 1993 (Madsen, 2006, p. 347). Active labor market expenditures as a share of GDP nearly doubled from 0.8% of GDP in 1985 to 1.5% by 2005, with most expenditure devoted to training rather than employment subsidies or public-sector job creation. The increase is particularly impressive as unemployment fell to less than 5% by 2005 (Eurostat, 2011).
This creative corporatist deal benefited both trade unions and employers. The former retained members by delivering training-based services (Schulze-Cleven, 2009). Meanwhile, investment in training generated new opportunities for Danish firms. The share of high-technology manufactured exports more than doubled between 1980 and 2000, outpacing large, liberal economies such as the United Kingdom and the United States (Bitard et al., 2008, pp. 490-492). As Table 1 relates, Denmark’s position in high-technology services is even more impressive, ranking second in the EU after Sweden.
High-technology competition is particularly notable because it revolved around new enterprises rather than established firms. Telecommunication activity, for example, shifted from Great Northern, a century-old Copenhagen-based conglomerate to a small set of high-technology start-ups and spin-offs in Aalborg (Dalum, Pedersen, & Villumsen, 2005). Entrepreneurs cite the local university’s role in creating skilled engineers, while active labor market policies moved lower skill workers from shipyards and textile plants into mobile communications (interviews with former Confederation of Danish Industry director, March 14, 2006, former Danish electronics firm director, March 23, 2006, and Danish electronics firm director, March 24, 2006). Nor is restructuring limited to telecommunications equipment. The Danish biotechnology industry is even more robust. Like with the telecommunications industry, restructuring is based on new start-ups rather than established pharmaceutical firms, with industry representatives emphasizing an increasingly robust venture capital market and public investment in human capital during the early 1990s (interviews with a Danish biotechnology firm director, March 7, 2006, and a director at Medicon Valley Academy, March 21, 2006).
Conclusion: Creating Creative Corporatism
The Danish, Finnish, and Swedish experiences reveal that neo-corporatist institutions can be and have been adapted to grapple with a much broader array of disruptive developments from the fragmentation of production and outsourcing to climate change. To what extent can other countries replicate these strategies? In each case, creative corporatism was shaped by the interaction between crisis and cooperation. Institutional conversion was precipitated by significant economic downturns that enabled policy makers to credibly threaten trade unions, which were strong enough to make unilateral reform costly but not strong enough to block it altogether. Countries that did not face similar pressures, most conspicuously Norway with its otherwise identical social democratic heritage, sizeable trade unions, and large public sector, have largely defended their bank-based financial systems and generous social policies (Kristensen, 2011, p. 238). Similar developments prevail when policy makers cannot credibly threaten trade unions. In Germany, federal government structures and the constitutional principles of tarifautonomie insulated trade unions from political threats, inhibiting negotiated adaptation (Ebbinghaus & Hassel, 2000, p. 59).
A crisis that threatens organized labor, however, does not ensure creative corporatist reform. Creative corporatism was also based on the ability to leverage existing patterns of cooperation. Firms were more likely to support ambitious investments and share sensitive information about skill profiles and product portfolios when embedded within interfirm, private–public, or industry–labor networks. As noted above, countries with a weak or conflicted history of neo-corporatist governance, such as Ireland and the Netherlands, have largely prioritized wage restraint, fiscal retrenchment, labor market deregulation, and tax concessions. Variation among creative corporatist economies supports this point. As described above, Finland, with its historically labor-exclusionary, industry-based pattern of conservative corporatism, invested much more heavily in research and development than in continuing education. Denmark, with its legacy of local industry–labor cooperation, has emerged as a model for active labor market policy but has invested less aggressively in research and development. Paradoxically, the countries that are most likely to embrace creative corporatism are those such as Austria and Norway that rely most heavily on traditional, conservative corporatist institutions.
This is not to argue that creative corporatism is a panacea in an increasingly disruptive international economy. There are diminishing returns to supply-side investment. Swedish investments in early-stage risk capital did not reflect comparable gains in managerial acumen. Venture capitalists were criticized for making poor investments at the height of the dot-com boom, neglecting technological and market fundamentals (Augustsson, 2005, p. 100). Similarly, Finnish innovation policies have propelled the country to the top of the EU in patenting, but have not always yielded commercial successes. Finnish research policies do not always address nontechnological, demand-side interactions with retailers and customers that shape innovation (Beise, 2004) and have been criticized on these grounds (Georghiou, Smith, Toivanen, & Ylä-Anttila, 2003). For example, Nokia’s recent difficulties in the market for high-end phones have less to do with its industry-leading R&D budget than its notoriously poor relations with the mobile operators and independent application developers (O’Brien, 2009, 2011). Nokia’s struggles also illuminate the broader dangers associated with creative corporatism, as countries exiting traditionally stable low- and medium-technology niches are more vulnerable than ever to disruptive technological and social innovations. In broadening the scope for institutional innovation, however, this article suggests that new challenges are just as likely to be with neo-corporatist adaptation as market-oriented reform.
Footnotes
Acknowledgements
The author wishes to acknowledge detailed feedback from Christopher Allen, Dan Breznitz, Jonah Levy, Mark Zachary Taylor, J. Nicholas Ziegler, John Zysman, and three anonymous reviewers. Responsibility for any remaining errors or omissions rests with the author.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research project was funded with grants from the German Marshall Fund of the United States and the American-Scandinavian Foundation.