Microeconomics of Competitiveness: Firms, Clusters, and Economic Development

Submission of Assignment Student : Mas Wigrantoro Roes Setiyadi NPM : 8605210299 Program : S3 Ilmu Manajemen Pasca FEUI Date of Submission : September 13, 2005
Case: Finland and Nokia Assignment: 1. How was Finland able to move from a sleepy economy to one of the most competitive nations in the world by the end of the 1990s? 2. How was Finland able to become a world-leading nation in mobile communications? Why did this cluster emerge rather than others? 3. Why did Nokia become the world leader in mobile handsets? 4. What are the critical challenges for the Finnish government in 2001? For participants in the Finnish mobile communications cluster? For Nokia? 5. Given telecom downturn, what should the government do next? What should the private sector do?

Answers: 1. Competitiveness of the nation does not lie on the government but rather depends on the capacity of its industry to innovate and upgrade (Porter, 1998). It is believed with innovation and upgrade industry as aggregate of companies would lead to increasing level of productivity. Porter emphasizes the importance of productivity as the prime determinant of a nations long-term standard of living. In most situations, industry will need government involvement to play its roles as facilitator (Musgrave, 1989) or through making public policy (Grindle & Thomas, 1991). However, the less the government gets involved in the economy, the better it is for the economy (Yoshihara, 2000). Within these controversial ideas on how the government should take roles in economic development, Finlands government implemented various policies, which improved industry performance.

In response to bad economic condition in early 1990s, Finland government adopted tight macroeconomic policy; this is among others carried out by cutting public expenditure to nearly 105 of GDP, to make budget surpluses by the end of 1990s. In addition, monetary

policy also followed the fiscal policy. Both policies seemed to be the basis for economic recovery as seen in 1993 the GDP grew at average of 4%, while inflation fell to less than 2%.

In other areas, Finland also changed its science and technology policy by making additional resources for research and development. The most importance policy that affect to the future of telecommunication technology supremacy is the policy to set up industry clusters, incubators, and venture capitals facilitating start up companies.

Open market policy to dismantle restrictions of foreign ownership of Finnish firms also can be pointed as the right policy Finland ever made. With such policy, new investment syndicates were established, where public sector invested alongside venture capitalists.

Regional Development Act strengthened policy-making of the region in developing economic through integration of Center of Excellence. While in international fora, policy to join European Economic Area (EEA) eliminated trade and investment barriers to other Nordic and European countries.

Overall, transformation of Finnish industry through various and coordinated policies created composition and industry structure, and eventually some industry products became leader in global market.

2. It started by end of 1990s when parliament enacted a mandate to the government to withdraw from telecommunication business. Although the mandate created disappointment within Sonera, nevertheless the policy marked as the beginning of market liberalization in telecommunication sector in Finland. In general, telecommunication business can be grouped into 2 categories: equipment manufacturing and services (ITU, 2005). The mandate not only aimed to telecommunication operators as service providers, as stipulated in Telecommunication Services Act, but also to telecommunication equipment industry. Considering Finland population, telecommunication services may not have potential to play leading roles in global market for mobile communication. Meanwhile, telecommunication equipment industry may have potential to become market leader, should such industry has appropriate competitive strategy.

Using The Diamond of National Advantage theory (Porter, 1998), the strategy adopted by Finland begun with crafting factor conditions by creating a standard (Nordic Mobile Telephone / NMT) and adoption of global standards (GSM, CDMA, WCDMA), as a country has strong influence in making technology standard will enjoy economic and other intangible benefits (Goleniewski, 2002).

In addition, Finland applied industry cluster strategy, despite though competition in mobile communication business. There are factors that shape the cluster emerge rather than others: a. The cluster represents inclusive approach accommodating all related players in telecommunication equipment industry, it based on value creation from direct raw material to valuable goods and services benefited by users; b. Members of the cluster also coming from capital market as well as education and research institutions; c. Strong personality character as factor conditions owned by Finnish such as pragmatic, honest, quiet, and serious; d. Finnish local customers are sophisticated and demanding for products that may have string impact to global market; e. The cluster also acts as market of production factors for input to the industry, industry benefits from this efficient domestic market; and f. Finish government encourage investment and sustained upgrade for every participants in the cluster.

3. Nokia leading position in world mobile handset was result of: a. Strong and easy access to capital sources; b. Corporate culture leading to Nokia Way: customer satisfaction, respect for the individual, achievement, and continuous learning; c. Non-political, and built on trust; d. Division leading to focus on particular area: Networks, Mobile Phone, and Ventures; e. Mobile Phone Division serves every market in the world, user friendly, available in multi-language; f. Successful in shifting from merely communication gadgets as technology product to fashion item and consumer good; g. Create innovation of mobile Internet; h. Manufacturing facilities near to target market, reduce costs;

i. j.

Qualified and strong support of R&D units; Outsourcing to low cost countries;

k. Global operations for marketing and technical support; and l. Standard and trend setter.

4. In 2001 Finnish government facing problems ranging from overall growth rates were declining, major export were feeble, telecommunication sector experience downturn, and Nokia as the flag company of the country its revenue and profits sliding down. After enjoy rapid economic development based on technology and resource based business (such as metal, pulp, and forestry products), nevertheless Finland was not free from international turbulences. International competition grew though mainly after China entering telecommunication equipment with relatively low price. As new entrants, Huawei, ZTC, and other small manufacturers shake global market. Not only Nokia, but other international telecommunication vendors also affected by emergence of China products. Finland government at large and Nokia in particular, unfortunately were late in anticipating emergence of new entrants.

Following fall of Berlin wall and Finland join European Union, flow of people within European countries relatively less restrictive. Intellectual such as skilled engineers and scientist have more space to seek better life in country which offer better wages and benefits. On the other side, domestic industry cluster need more qualified employees, but national universities can not produce the required demand. This become ironic, when demand for skilled employee rise but domestic market can not fulfill, while international employment market prefer to work in other countries. Scarcity of human resource may lead to serious problem for sustainability of a country, industry, as well as company.

5. The government should review its industrial policy including other relevant policies that may have impact to telecommunication sector. Using Porters Diamond approach, evaluating each determinant and its dependent relationship will be a must. Market orientation need to be reviewed, amidst saturated domestic market for telecommunication equipment and services, policy to facilitate Nokia and other member of telecommunication industry cluster to presence in global market should be launched immediately.

On the other hand, private sector should redefine its business strategy, emphasizing the need to collaborate among member of telecommunication cluster. Competitive strategy based on cost leadership, innovative and unique products, and focus on particular niche market could be a choice of strategy. Industry member, such as Nokia could continue to shape the market by using its power in influencing demand. Continue creation of stylish but short life cycle mobile handset is one example that Nokia could do. In addition, making related and support industry to be more competitive also things that both government and private sector could collaborate. Outsourcing or relocating some of component industry to China for instance may become an alternative strategy.

References: 1. Porter, Michael (1998), On Competition, Harvard Business Review Book. 2. Yoshihara, Kunio (2000), Asia Per Capita, Why National Income Differs in East Asia, Curzon Press. 3. Grindle, Merilee S & Thomas, John W (1991), Public Choices and Policy Change, The Political Economy of Reform in Developing Countries, The John Hopkins University Press. 4. Musgrave, Richard A & Musgrave Peggy B (1989), Public Finance in Theory and Practice 5th edition, McGraw Hill. 5. Goleniewski, Lilian (2002), Telecommunications Essentials, Addison Wesley.

6. http://www.itu.org