Benchmarking countries - University of Ljubljanawebv1ef.ef.uni-lj.si/dokumenti/wp/paper_new.doc · Web viewBENCHMARKING DRŽAV: PRIMERJAVA KONKURENČNOSTI IRSKE, FINSKE IN SLOVENIJE

BENCHMARKING COUNTRIES: COMPARING COMPETITIVENESS OF FINLAND, IRELAND AND

SLOVENIABENCHMARKING DRŽAV: PRIMERJAVA

KONKURENČNOSTI IRSKE, FINSKE IN SLOVENIJE

Marko JakličHugo Zagoršek

Faculty of Economics, University of Ljubljana

Working paper

Ljubljana, 2002

Benchmarking competitiveness of Finland, Ireland and Slovenia

Summary

The paper seeks to identify and compare the competitive strategies of Finland, Ireland and Slovenia. It goes beyond the ordinary benchmarking process of identifying best practices. It acknowledges and explores the specific features of each country and tries to identify the drivers of success for each of them. It aims to find out why these economies, otherwise comparable in size and certain other factors, achieve different rates of economic development. In the paper we explore and compare major elements of the national business systems, such as government, financial environment, human resources R&D policies, and infrastructure. Next we identify four common factors of success for Ireland and Finland, and draw a comparison with Slovenia. At the end some suggestions are provided on how can Slovenia do better.

Povzetek

V študiji analiziramo in primerjamo strategije za doseganje konkurenčnosti, ki so jih ubrale Irska, Finska, in Slovenija. Osnovno vodilo študije je ugotoviti, zakaj te države, drugače medsebojno dokaj podobne po velikosti, številu prebivalstva, in nekaterih drugih dejavnikih, dosegajo različne stopnje gospodarskega razvoja. Analiziramo sedanjo konkurenčnost teh držav ter ugotavljamo globlje družbene, ekonomske in institucionalne dejavnike, ki so bili ključni za njihov uspeh. Države najprej primerjamo po osnovnih elementih nacionalnega poslovnega sistema, kot so država, človeški viri, finančni sistem, raziskave in razvoj ter infrastruktura. Nato izpostavimo ključne skupne in posebne dejavnike uspeha Irske in Finske ter na osnovi tega oblikujemo nekaj predlogov za nadaljnji razvoj Slovenije.

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INDEX

1 INTRODUCTION 32 DEFINING COMPETITIVENESS 3

2.1 IMDs World Competitiveness Yearbook 32.2 The Global Competitiveness Report 32.3 Economic Development 32.4 Benchmarking competitiveness 3

3 BENCHMARKING COMPETITIVE POSITIONS OF IRELAND, FINLAND AND SLOVENIA 3

3.1 Introduction To Three Economies 33.2 Ireland 33.3 Finland 33.4 Slovenia 3

4 GOVERNMENT & COMPETITIVENESS STRATEGY 34.1 GOVERNMENT EFFICIENCY 34.2 COMPETITIVENESS POLICY 34.3 PROMOTING ENTREPRENEURSHIP 34.4 DEVELOPING CLUSTERS 3

5 HUMAN RESOURCES 35.1 SOCIETY: CULTURAL NORMS & VALUES 35.2 EDUCATION 35.3 LABOUR MARKET 3

6 NATIONAL INNOVATION SYSTEMS AND R&D POLICY 36.1 Finland 36.2 Ireland 36.3 Slovenia 36.4 Comparison 3

7 FINANCIAL ENVIRONMENT 37.1 Finland 37.2 Ireland 37.3 Slovenia 37.4 Comparison 3

8 (ICT) INFRASTRUCTURE 38.1 Finland 38.2 Ireland 38.3 Slovenia 38.4 Comparison 38.5 Software clusters 3

9 KEY SUCCESS FACTORS OF IRELAND AND FINLAND 39.1 Common factors 39.2 Specific factors 3

10 WHAT COULD SLOVENIA DO 311 REFERENCES 3

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1 INTRODUCTION

There is no doubt that successful, innovative and competitive enterprises form the foundation of nation’s prosperity. They are the main engine of competitiveness. However, nations shape the environment in which those enterprises operate and thus have profound influence on their competitiveness. A significant part of the competitive advantage of nations stems from existing resources and institutional framework as well as from far-reaching incentive policies emphasizing knowledge creating and entrepreneurship, promoting exports and attracting foreign companies. International success of the country/company depends on its ability to innovate, on size and efficiency of investments in R&D, human capital potentials, which depends on education system, and on technological infrastructure, which is partly historically defined (Jaklič, 1999, 118). The most successful countries recognize strengths and weaknesses of their environments. Just like businesses they develop distinct competitive strategies, tailored to specific conditions of their economy and society in general.

This article tries to identify and compare competitive strategies of Ireland, Finland and Slovenia. It goes beyond ordinary benchmarking process of identifying best practices. It acknowledges and explores specifities of each country and tries to identify drivers of success for each of them. Its aim is to find out why those economies, though comparable in size and some other factors, achieve different rates of economic development. Why is Finland or Ireland such a success? Why does Slovenia lag? And what can Slovenia do to become more competitive?

We believe that Slovenia can learn much from the experience of two “developmental stars.” However, we warn against blindly copying best business practices or specific public policies found in those two countries. Without a thorough grasp of the conditions under which policies succeed, benchmarking exercises may lead to wrong conclusions, since similar policies cannot be expected to render similar results in different environments (UNESCO, 1998). Therefore, this paper aims to provide comprehensive picture of current competitiveness of three nations and various factors that have influenced it over time.

Second chapter addresses the issue of competitiveness of nations in connection with three stages of development. Some thoughts and findings about methodology of competitiveness benchmarking are also presented. Next section introduces three economies. Following chapters compare those countries in terms of government and industrial policy strategy, human resources, national innovation system, infrastructure and financial system. In the final chapters key success factors that emerge as recurrent theme throughout the report, are presented. They may be common to both countries or specific to just one of them. Instead of the conclusion some ideas about possible actions that Slovenia can take to become more competitive are presented.

2 DEFINING COMPETITIVENESS

Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. They include land, natural resources, labor, and the size of the local population. Schumpeter emphasized the key role that entrepreneurship has played, serving as an engine for development. Robert Solow’s work addressed the importance of technological innovation and increased know-how in an economy in order to grow.

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According to Michael Porter (1990), "a nation's competitiveness depends on the capacity of its industry to innovate and upgrade". In addition, "they benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers". Competitive advantage of nations results from the differences in culture, management style, infrastructure, economies, institutions, histories, demographics, and other factors that affect the way people live and do business. So by using such differences to continuously improve and innovate, a nation's competitive advantage will increase.

OECD (2002) defines competitiveness as “the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term”.

Krugman (1994) defines competitiveness as sustained increase in real incomes and in the standards of living of regions or nations, with jobs available for all those who wish to find employment. This concept, which is different from the narrower concept applying to the competitiveness of enterprises, implies that domestic factors are the dominant determinants of competitiveness. 1

In the following paragraphs we will take a closer look to how IMD, WEF and Michael E. Porter explain competitiveness with its main factors and how they try to measure it.

2.1 IMDs World Competitiveness Yearbook

In a global world, nations compete to sustain and increase their standard of living. This standard of living is improved by wealth creation. In any given industrialized society, wealth creation begins with enterprises or individuals, which produce goods and services. The state itself does not participate directly in this economic process, although it can own the capital of enterprises. It is nevertheless a key actor in determining a country’s standard of living, since it sets the rules that will define the framework for the creation of economic wealth (Garelli, 2002).

The IMD in its World competitiveness yearbook 2002 looks at the relationship between a country’s national environment (where the state plays a key role) and the wealth creation process (assumed by enterprises and individuals). Four competitiveness factors, which generally define a country’s national environment and sustain world competitiveness, are according to WCY:

Economic Performance Government Efficiency Business Efficiency Infrastructure

With analyzing these factors and various criteria, the WCY assumes that healthy performance in these dimensions creates a national environment that sustains world competitiveness. The IMDs World Competitiveness Yearbook thus “analyses and ranks the ability of nations to provide an environment that sustains the competitiveness of enterprises” (WCY, 2002)1 See P. Krugman (1994): “Competitiveness: A Dangerous Obsession”, Foreign Affairs, March/April for a discussion of these concepts.

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The four dimensions that shape the country's competitive environment are2: Attractiveness vs. Aggressiveness (Some nations manage their competitiveness by being

aggressive (exports or FDIs) others by being attractive.) Proximity vs. Globality (The economy of proximity provides value-added close to the end

user, but economy of globality assumes that production need not necessarily be close to end-user.)

Assets vs. Processes (Some nations are rich in assets as land, people, and natural resources – but are not necessarily competitive. Others are poor in resources and rely essentially on transformation processes.)

Individual Risk Taking vs. Social Cohesiveness (If a system promotes individual risk or preserves social cohesiveness.) These dimensions are often results of tradition, history or value systems and are so deeply

rooted in the 'modus operandi' of a country that, in most cases, they are not clearly stated or defined. However, it is important to recognize them in order to highlight a competitiveness profile of an economy and to foresee how it may evolve.

Competitiveness is a dynamic concept. Since everybody competes, almost, with everybody else, it forces each economic actor in a country to rethink its role and responsibilities accordingly. Probably, the most difficult hurdle is to overcome a classical approach to economic affairs, which traditionally emphasizes exports, tangible goods, and basic infrastructure. Competitiveness also highlights the importance of education, knowledge, intangible goods and technological infrastructure. Garelli (2002) especially emphasizes the importance of knowledge, which he calls the most critical factor for competitiveness. The ability of a nation to develop an excellent education system and to improve knowledge in the labor force through training is vital to competitiveness.

At the end IMD states that there are several rules that a county must follow in order to increase their competitiveness. These rules are presented in Figure1.

2 For more see WCY 2002 p. 660.

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Figure 1: The Golden Rules of Competitiveness

Golden Rules of Competitiveness

What is it that countries must do in order to become or stay competitive?They must:

ICreate a stable and predictable legislative environment.

IIWork on a flexible and resilient economic structure.

IIIInvest in traditional and technological infrastructure.

IVPromote private savings and domestic investment.

VDevelop aggressiveness on the international markets (exports) as well as attractiveness for

foreign direct investment.

VIFocus on quality, speed and transparency in government and administration.

VIIMaintain a relationship between wage levels, productivity and taxation.

VIIIPreserve the social fabric by reducing wage disparity and strengthening the middle class.

IXInvest heavily in education, especially at the secondary and in the life-long training of the labor

force.

XBalance the economies of proximity and globality to ensure substantial wealth creation, while

preserving the value systems that citizens desire.Source: IMD, 2002.

2.2 The Global Competitiveness Report

In the beginning of the 1990 Michael E. Porter developed a theory about competitiveness of nations Theory is based on diamond approach that illustrates the systematic relationship between

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factors of competitiveness. Porter is one of the leading economics in the WEF and their report is largely based on his findings, therefore we will present them together.

The main difference between IMD’s report and WEF’s is that the first focuses mainly on the macroeconomic, political, and legal circumstances that support a successful economy. However, these macroeconomic conditions are necessary but not sufficient. They provide the opportunity to create wealth, which is then created in the microeconomic foundations of the economy, rooted in company operating practices and strategies as well as in the quality of the inputs, infrastructure, institutions, and array of regulatory and other policies that constitute the business environment in which a nation's firms operate (Schwab, Sachs & Porter, 2002).

Porter (2002) argues that national prosperity depends on competitiveness, which reflects the productivity with which a nation uses resources. Productivity of economy is measured by the value of goods and services produced per unit of the nation's human, capital and natural resources. Productivity depends both on value of nation's products and services, measured by the prices they can command in open markets, and the efficiency with which they can be produced.

The conditions for rapid and sustained productivity growth are dependent on (Figure 2): Political and legal institutions coupled with stable and sound macroeconomic policies, which

set the overall context for prosperity, and The ability of firms to create valuable goods and services using productive methods, which is

the one that actually creates wealth.

Figure 2: Determinants of Productivity and productivity growth

Source: WEF, 2002.

The microeconomic foundations of productivity rest on two related areas: (1) the sophistication with which companies or subsidiaries based in country compete, and (2) the quality of the microeconomic business environment. National productivity is according to Porter (2002) ultimately set by the productivity of a nation’s companies. However, the sophistication of companies is inextricably intertwined with the quality of the national business environment.

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Macroeconomic, Political, and Legal Context for Development

Sophistication of Company Operations and

Strategy

Quality of the Microeconomic Business

Environment

Microeconomic Foundations of Development


The business environment can be understood in terms of four interrelated influences (the diamond of national advantage) (Figure 3):

1. Factor conditions (i.e. the nation's position in factors of production, such as skilled labor and infrastructure),

2. Demand conditions (i.e. sophisticated customers in home market), 3. Related and supporting industries, and 4. Firm strategy, structure and rivalry (i.e. conditions for organization of companies, and the

nature of domestic rivalry).The individual points on the diamond and the diamond as a whole affect four ingredients that

lead to a national comparative advantage. These ingredients are: the availability of resources and skills; information that firms use to decide which opportunities to pursue with those resources and skills; the goals of individuals in companies; the pressure on companies to innovate and invest.

Figure 3: Determinants of National Competitive Advantage

Source: Porter, 1990.

Factor ConditionsThe situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries.

These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities,

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Related and Related and Supporting Supporting IndustriesIndustries

Firm Firm Strategy, Strategy,

Structure and Structure and RivalryRivalry

Demand Demand ConditionsConditions

Factor Factor ConditionsConditions

Government

Chance


deregulation of labor markets, or liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal.

This explains the existence of so-called low-cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market).

Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions.

Home Demand ConditionsDescribes the state of home demand for products and services produced in a country.

Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization's ability to recognize customers’ needs than foreign markets do.

Related and Supporting IndustriesThe existence or non-existence of internationally competitive supplying industries and supporting industries.

One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software). A typical example is the shoe and leather industry (e.g. footwear cluster) in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design

Firm Strategy, Structure, and RivalryThe conditions in a country that determine how companies are established are organized and are managed, and that determine the characteristics of domestic competition.

Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-

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managers will behave differently than publicly quoted companies. Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.

Government's Role The government plays an inevitable role in Porter’s diamond model. Like everybody else,

Porter argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"3

The role of government in the model is to: encourage companies to raise their performance, for example by enforcing strict product standards; stimulate early demand for advanced products; focus on specialized factor creation; stimulate local rivalry by limiting direct cooperation and enforcing antitrust regulations.

In his latest work Porter (2002) beside government emphasizes also the role of institutions (universities, schools, infrastructure providers, standard-setting agencies, etc.), which contribute to the quality of business environment and should therefore be connected to the economy and linked with the private sector. However, also the private sector must play an active role in shaping of the business environment, so individual firms can establish schools, attract suppliers, or define standards that not only benefit themselves, but also improve the overall environment for competing.

Moreover, Porter (1990) has emphasized the role of chance in the model. Random events can either benefit or harm a firm's competitive position. Typically, such events are

Major technological breakthroughs or inventions. Political decisions by foreign governments. Acts of war and destruction. Dramatic shifts in exchange rates. Sudden price shocks affecting input goods (such as the oil price shock in the early 70s) Sudden surges or drops in world demand or sudden shifts in consumer preferences.

Porter CritiqueAlthough Porter theory is renowned, it has a number of critics.

1. Porter developed this paper based on case studies and these tend to only apply to developed economies.

2. Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of

3 Governments can influence all four of Porter’s determinants through a variety of actions:

Subsidies to firms, either directly (money) or indirectly (through infrastructure).

Tax codes applicable to corporation, business or property ownership.

Educational policies that affect the skill level of workers.

They should focus on specialized factor creation.

They should enforce tough standards.

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market-share erosion and decline. However, there seems to be little empirical evidence to support that claim.

3. The Porter model does not adequately address the role of MNCs. There seems to be ample evidence that the diamond is influenced by factors outside the home country.

Rouvinen and Ylä-Anttila (1997) argue that the biggest limitation of Porter’s model is that it is essentially backward looking. Model explains the arising and development of industry clusters, but is unable to forecast how they will develop in the future. They quote nine categories of criticism of Porters approach to competitiveness: Where the competitive advantage is actually created – competitiveness is not necessary found in

clusters; there are many successful ‘lone stars’, The diamond model does not properly take into account foreign direct investments and

multinational enterprises, This model might not be suitable for small open economies, Perhaps it is the only applicable to resource-based industries, Differences in national cultures should have had greater emphasis in the model, The methodology as a whole might not be valid; Porter’s ideas may be too loose and only

seemingly theoretical, The role of macroeconomic variable in Porter’s model is unclear, It is unclear, whether the model is really dynamic or static, and The studies might not be conducted rigorously.

Some of critics are relevant for our case of Finland, Ireland and Slovenia, therefore a precaution should be used when applying Porter’s model to these three economies.

2.3 Economic DevelopmentSuccessful economic development is a process of successive and co-evolving progress in

which enterprises and their supporting environment are able to engage in increasingly sophisticated form of international competition (Jaklič, 2002). As nations develop, they progress through a number of stages in terms of their characteristic competitive advantages and modes of competing (see Figure 4).

Figure 4: Stages of economic development

Source: WEF, 2002.

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Factor-Driven Economy

Investment-Driven

Economy

Innovation-Driven

Economy

Input Cost Efficiency Unique Value


In the Factor-Driven stage, basic factor conditions such as low-cost labor and access to natural resources are the dominant sources of competitive advantage and international products. Firms produce commodities or relatively simple products designed in other, more advanced countries. Technology is assimilated through imports, foreign direct investment, and imitation. In this stage, companies compete on price and lack direct access to consumers. They have limited roles in the value chain, are focused on assembly, labor-intensive manufacturing, and resource extraction. A Factor-Driven economy is highly sensitive to world economic cycles, commodity price trends, and exchange rate fluctuations (Porter, 2002). At this level, the basic role of the government is to ensure political and macroeconomic stability as well as adequate market operations that will enable the effective use of the primary production factors by domestic and foreign enterprises (Jaklič, 2002).

In the Investment-Driven stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. The products and services produced become more sophisticated, but technology and designs still largely come from abroad. Technology is accessed through licensing, joint ventures, foreign direct investment, and imitation. However, nations in this stage not only assimilate foreign technology, but also develop the capacity to improve on it. At this developmental level, government priorities must increasingly be oriented toward the development of physical infrastructure (ports, roads, telecommunications) and regulations (customs, taxes, laws regulating enterprises) (Jaklič, 2002). The national business environment supports heavy investment in efficient infrastructure and modern production methods. An Investment-Driven economy is concentrated on manufacturing and on outsourced service exports. It is susceptible to financial crisis and external, sector-specific demand shocks.

In the Innovation-Driven stage, the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage. The national business environment is characterized by strengths in all areas together with the presence of deep clusters. Institutions and incentives supporting innovation are well developed. Companies compete with unique strategies that are often global in scope. An Innovation-Driven economy has a high service share, and is resilient to external shocks (Porter, 2002).

The competitiveness of a country at this level depends primarily on the opportunity for continuing education in the society and the capacity for the commercial application of the newest technologies. This transition requires the direct involvement of the government in creating incentives for innovation through public and private investment in research and development, through the suitable development of higher education (which must take priority within the school system), through the development of a financial system that must enable a greater degree of risk in the system (for example, both state and private venture capital are necessary, and the operation of a state development bank is also often called for), and through regulatory mechanisms that stimulate the creation of high technology enterprises (for example, reducing administrative impediments to founding enterprises, more liberal bankruptcy legislation for such enterprises, the protection of intellectual property rights, and stimulating precision demand) (Jaklič, 2002).

As Jaklič sums up the basic factors that contribute to international competitiveness are thus differentiated at different developmental levels. For countries in the first developmental level, the greatest challenge lies in how to properly connect the operation of primary production factors. At the second developmental level, the ability to acquire foreign direct investment or foreign knowledge necessary for beginning the process of inclusion into the international distribution of business

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activities becomes significant. At the third level, the greatest challenge lies in achieving a high degree of innovation and the commercialization of new technologies.

Before moving further we should look at the measures of competitiveness that are used by aforementioned institutions. They measure the competitiveness as follows:

IMD’s World Competitiveness Index (WCI) “…measures and compares how countries are doing in providing firms with an environment that sustains the domestic and global competitiveness of the firms operating in their borders (Rosselet – McCauley, 2002).

WEF’s Current Competitiveness Index (CCI) “…evaluates the underlying conditions defining the current level of productivity …” (Porter, Sachs and McArthur, 2002).

WEF’s Global Competitiveness Index (GCI) “… aims to measure the capacity of the national economy to achieve sustained economic growth over the medium term, controlling for the current level of economic development” (McArthur, Sachs, 2002).

There is no single “recipe” for competitiveness. As we will see various policies and activities can be benchmarked, and then each individual country needs to adapt them to their own environment. Competitiveness strategies succeed when they balance the economic imperatives imposed by world markets with the social requirements of a nation formed by history, value systems, and tradition.

2.4 Benchmarking competitiveness Benchmarking was originally developed as a management tool to assist individual enterprises

to identify their weaknesses and strengths in relation to competitors and thus help them to identify ways of improving their relative performance. It was soon adopted by public companies and non-profit organizations as well. In recent years it is becoming increasingly accepted by national governments as a tool for national policy. Japanese and Asian NIC countries were among the first to adopt benchmarking, but the practice is spreading swiftly to a variety of nations.

Benchmarking in the context of national competitiveness is an instrument for increasing

national performance through improved policy design and practices. Benchmarking provides an opportunity for learning and stimulates the application of new solutions and practices that increase country’s competitiveness. The main aim of such benchmarking is to identify which government actions and policies work best given the specific conditions of the country. The specificity clause is crucial. Without a thorough grasp of the conditions under which policies succeed, benchmarking exercise may lead to the wrong conclusions since similar policies and actions cannot be expected to render similar result in different environment (UNESCO, 1999). To ensure success of benchmarking and transferability of gained knowledge, it is necessary to compare a country with as much similar (in terms of size, economic structure, environment, culture and institutional framework) but more successful and competitive countries as possible.

The benchmarking methodology involves analytical and measurement activities at four stages. The benchmarking process begins with performance benchmarking4. This requires indicators for measurement of performance, for identification of best performers, and for measurement of gaps in relation to the best performers. Performance benchmarking indicates where best practices are likely to be found, i.e. which strategies, processes and designs of policies lead to high-level performance. Strategy benchmarking compares strategies employed by local governments that aim to increase

4 For more about diffferent types of benchmarking see Debeljak, Prašnikar and Ahčan (2002).

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competitiveness. In order to understand and evaluate different strategies and reasons for their success (or failure) as well as to learn something from it, it is necessary to perform competitive advantage benchmarking, which seeks to thoroughly understand environment of the country, its background institutions (Whitley, 1992) and other sources of competitive advantages (or disadvantages of the country).

Competitiveness benchmarking tries to understand and comprehend interaction of existing environmental factors (resources, culture and values of society, history), institutional and infrastructure framework, nature of business system and various government actions and policies (competitive strategy of country) that lead to international success of the country and its enterprises. Its objective is the improvement of national business system. The ultimate aim of the benchmarking is that the new knowledge - gained in earlier benchmarking stages - should be applied to policy making on national, regional and enterprise level and thus contribute to nation’s competitiveness.

3 BENCHMARKING COMPETITIVE POSITIONS OF IRELAND, FINLAND AND SLOVENIA

3.1 Introduction to Three Economies Finland and Ireland are successful European Union members; Slovenia is a successful EU

applicant member. Can we compare these three countries? They certainly have many things in common. We can start with history. For centuries had all three nations been under rule of their conquerors, freedom or independent state came in 20 th century. For Finland and Ireland about 80 years ago (1917 and 1921, respectively), while Slovenia gained independency in 1991. All three countries are also very homogenous, Finns, Slovenians and Irish people are by far the largest groups in their countries (more than 90%)5. One of the important issues in comparing those three countries is their size - they all have relatively small population.

Table 1: Key indicators of Finland, Ireland and Slovenia

Category Finland Ireland SloveniaPopulation (2001) 5.175.783 3.840.838 1.930.132GDP, 2001 (billions of USD) 120,9 105,2 18,7GDP per capita at PPP, 2001 25,033 31,064 17,813Real GDP growth, 2001 0,4 5,0 3,7Overall productivity (GDP per persons employed) 51,404 58,876 20,543Overall productivity (PPP) 55,239 66,594 39,323Labor productivity (GDP per person employed per hour, USD) 29.83 32.75 9.75Labor productivity (PPP) 32.06 37.04 18.67Sophistication of Company Operations and Strategy Rank* 2 17 28Quality of Business Environment Rank* 1 22 35

*WEF (rank out of 75 countries)Source: CIA fact book, World Bank, WEF (2002), IMD (2002)

All three countries are small open economies, so macroeconomic environment can be compared. Essential for achieving high level of competitiveness is therefore export orientation which

5 All three countries have some historical land disputes: Ireland have Northern Ireland (U.K.), Finland have Karelia (Russia) and Slovenia have Koroška region (Austria) and Free Trieste Area -Zone A (Italy).

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influences industry as a whole. And here are some benefits as flexibility and also many negative consequences, most noticeably lack of economies of scale. Such a country must actually become a niche player. This demands also unique way for achieving growth. Finland and Ireland actually are examples of unique ways, how can countries with correct assessment of strengths-weaknesses find its own way to success. What about Slovenia? Slovenia needs its own way and a wise thing being one school example of successful country. And we have to know, that the point that Slovenia is at the moment is much better that was starting point of both comparing countries. Finland perhaps was not an underdeveloped country, let’s say 50 years ago, but Ireland definitely was6.

There are also many non-economics factors that countries have in common. All three countries have high alcohol consumption, high suicidal rates, Slovenia and Finland are European countries with larges percentages of area covered with Forests, and many other communalities. But important issue considering their growth and competitiveness is their geographical position. They all have big neighbors around, but here is more stressed their geographical position considering European Union. They are all far away from Brussels, and this can be also important factor of influence.

3.2 Ireland

The Irish people are mainly of Celtic origin. English is the common language, but Irish (Gaelic) also is an official language and is taught in the schools. Historically there have always been land disputes between people living on Irish island and United Kingdom, but from 1800 to 1921, Ireland was an integral part of the United Kingdom. Important historical moment was in the years 1846-48 when the potato crop failed, result was mass wave of Irish emigration to the United States accompanied with dissatisfaction with UK. The rebellion to the UK rule has growing through years and finally ignited the Anglo-Irish War of 1919-1921. The end of the war brought the Anglo-Irish treaty of 1921, which separated island on two parts: Republic of Ireland (Roman Catholic religion) and Northern Ireland as part of UK (predominately Protestant religion).

If we move from history of Ireland to the history of Irish people, we see that in the past Ireland was not a country that could be considered as successful. Fast growth is only recent, for about 15 years, and we should go from late 50’s to understand how the environment for present situation was created.

It is hard to know where best to locate the Irish story. It is an interesting case of macroeconomic stabilization and adjustment in a small and extremely open economy. It is a fascinating study in industrial strategy and modernization, a transformation from a weak peripheral economy to a significant centre of high-technology manufacturing and advanced services. It is a story of European integration, and the threats and opportunities it offers to small member states (O’Donnell, 1998).

6 Historical numbers are hard to compare, but we can mannipulate with some numbers. Fisher, Sahay and Vegh estimate, that GDP in those countries in 1937 was: Finland 3342USD, Ireland 3018USD and Yugoslavia 1284USD. As Finnland and Ireland numbers are comparable, on Yugoslavian GDP lies a big questionmark. Slovenia was part of Yugoslavia at that time, but the development gap between Slovenia and southern republics was even bigger than post WWII (estimation that Slovenia participate 35% of total YUG GDP with only 10% of population). So we can estimate, that historically none of the three countries didn’t gain any big advantage.

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A prominent characteristic of industrial growth in Ireland after the end of the 1950s was that the main source of growth was new investment by foreign-owned multinational companies which chose Ireland as a site in which to produce for export markets (Clancy et al, 2001).

Reason for Multinational Companies (MNC) choosing Ireland is in Irish foreign policy, which motivated Foreign investments by tax concessions and at that time low wage cost (relative to developed Western European countries). Tax concessions were significant:

In Ireland’s case, export profit tax relief (EPTR), which zero-rated tax on profits from exports and which largely benefited FDI in Ireland, had to be abolished under EU anti-competitive rules. It was replaced by a nominal ten per cent tax on all profits from manufacturing industry in Ireland (Wrynn, 1998)

Ireland attached Foreign Investments in even larger scale, when joined European Community in 1973, because there was another important issue: access to the Large EC market. Parallel to a macroeconomic strategy was also education system, which effectively managed to produce a good supply of people with certain key types of qualifications that matched with demand: first electronics and pharmaceuticals - later software.

For Irish industrial policy a big challenge was the transfer of FDIs and MNCs into growth of their own indigenous industry. Until the mid-eighties indigenous industry had a poor competitive record under free trade restrictions (more on that: O’Malley, 1989). During 1980s Irish policy began to focus more explicitly on the objective of developing Irish indigenous industry, but on the other hand still not neglect the importance of FDI.

The period 1980-1987 was one of prolonged recession, falling living standards, a dramatic increase in unemployment and, once again, the prospect of emigration as the best option for the young. By 1987, the debt/GNP ratio was approaching 130 percent and real fears of national insolvency emerged. Fifteen years after joining the EC, Ireland’s ability to manage in an increasingly global environment had been tested and found wanting (O’Donnell, 1998).

Crucial events happened in late eighties. White Paper on Industrial Policy was presented by the government in which there was a new strategy developed. Policy towards indigenous industry should be selective, in the sense of aiming to develop larger and stronger firms (rather than support SMEs)7. At the same time the aim was to strengthen the degree of integration of foreign-owned enterprises into the Irish economy.

Since about 1987 industry in Ireland has had a strong growth performance, both by comparison with trends earlier in the 1980s and by comparison with trends in other industrial countries. The particularly rapid growth of the Irish economy, which led to the coining of the term ‘the Celtic Tiger’, owed a great deal to the industrial sector which had an average growth rate of 10% per year after 1987(Clancy et al, 2001).

Of for the whole Irish industry growth is ten percents, and estimations are, that out of those ten percents the rate of growth of output of indigenous industry averaged at about 4% per year. This is about twice as industrial growth rate of EC average (or OECD).7 This was an specific approach

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Ireland story of success has been discussed on various papers; one of the most complex descriptions has been made by Irish author Rory O’Donnell, who describes story of success of the Celtic tiger as a four dimension framework (O’Donnell, 1998):

First, after 1987, Ireland achieved consensus-across both the social partners and the political parties-on the requirements for successful participation in the European economy and in the view the there was no way of escaping these requirements. Second, Ireland achieved a high degree of wage co-ordination; in Ireland’s case, this was done by means of centralize bargaining, which relied primarily on a cohesive trade union movement and strategy. Third, Ireland achieved a sufficient degree of consensus on public finance. This was necessary not only because Maastricht criteria but, more fundamentally, because of the way in which taxation and public provision interact with both, wage bargaining and the exchange rate. Fourth, Ireland (in its European context) had a set of supply-side characteristics that ensured international competitiveness and encouraged fast economic growth. These included a young, well-educated, English-speaking workforce, improved infrastructure (founded by both the EC and the Irish state), an inflow of leading US enterprises (attracted by both Irish conditions and the deepening European market), a new population of Irish enterprises (free of debilitating weaknesses of the past and open to new organizational patterns), and deregulation of the service sectors.

With application of Porter’s model to the Irish economy we can see, that its position is not very clear. If we consider Ireland as one of the global producers of innovative technology - as software definitely is - it would fit into the category of the highest developed economies, into innovation driven economy. But if we think about Ireland, is that so? Drivers of innovation are foreign MNC, and creation of unique value is not an Irish job. We will discuss about spill-over effect later in the case, but anyway most of innovation is encouraged by foreigners. So investment driven economy would fit better to Ireland, but as macroeconomics indicators tells us (especially GDP per capita), Ireland fits on the third stage.

3.3 Finland

The Finns arrived in their present territory thousands of years ago, pushing the indigenous Lapps into the more remote northern regions. Finland's nearly 700-year association with the Kingdom of Sweden began in 1154 with the introduction of Christianity by Sweden's King Eric. Following Finland's incorporation into Sweden in the 12th century, Swedish became the dominant language, although Finnish recovered its predominance after a 19th-century resurgence of Finnish nationalism. Sweden was changed with Russian Empire in 1809, until the end of 1917 (after the Bolshevik Revolution in Russia), when Finland declared its independence. Soon after declaration country experienced brief but bitter civil war, war with Germany for Lapland also two wars with Soviet Union. After treaties signed with USSR in 1947 and 1948 finally came peace.

As we have seen at the case of Ireland, successful industry policy can bring a country from lagging the world economy to become one of the leading countries, and an example of fast growth. The case of Finland is different. Irish policy has been the same for about 50 years - they started with attracting foreign investors after the end of the 1950s; but Finish story of success is different and

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especially faster. Finish example shows us, that something distinctly can emerge without the discovery of unknown natural resources, as it happen to their neighbor Norway in 1970s. Their case has started with creation of environment that enabled entrepreneurial spirit.

Now we will have a look at Finnish recent history, how the environment for success has been created. Finnish history can be divided on two parts: regulated (before eighties) and deregulated (after eighties). The shift have come with new enlightenment, that competitiveness can not be created with restrictions, regulations, subsidies, compensatory policies and other protectionist tools. As we saw on the Irish example, open economy and equal conditions for all players is essential for successful economy. As was Finnish economy heavily regulated until the 1980s, with liberalization came also better results.

In the early 1980s the Finnish industry entered new phase; the share of high-tech products increased considerably, and technological knowledge became a more noteworthy source of competitive advantage. The export share of high-tech products quadrupled during the 1980s, reflecting the improved educational level. Structural changes in the school system, however, have been more radical than in the production. In Porterian terms; the share of advanced and specialized factors of production (human capital) has increased considerably, but they have not yet been fully exploited.

In the beginning of the 1990s, however the finish economy plunged into a deep economic crisis and a lengthy recession. Capital was free to move across frontiers, international interest rates were high, and the sheltered inefficiencies of Finnish companies were becoming apparent (Tainio, Lilja, 2002).At the same time happened also collapse of Soviet Union, and they lost market for about a quarter of their exports. The situation was very hard, especially because Bank of Finland was committed to a policy of fixed and stable exchange rates. That even worsened the export conditions, so in autumn of 1991 Finnish Markka was devaluated. At this point begins the story of a company, that changed negative trends: Nokia. Importance of Nokia for Finland is unquestionable:

In 1999, Nokia’s share of total Finnish GDP was close to 4%8. Its share of total exports was 20% and share of the business sector R&D was as much as one third. Nokia accounts currently for more than 60% of the market capitalization of the Helsinki Stock Exchange (Tainio, Puputti, 2002)

Nokia has made plenty of good - and its share of bad - decisions in its long, checkered past. The company began in 1865 as a forestry enterprise, spread into rubber products before the century ended and then into electric cables in the early 1900s. As profits from these uncomplicated ventures waned, Nokia diversified into plastics, chemicals and, by the 1970s, consumer electronics. But its reputation -- like that of most Finnish manufacturers at the time - was second-rate compared with competitors in other Nordic nations such as Sweden and Denmark. For decades there wasn't much of an incentive for Finnish companies to excel, since they could sell virtually anything they produced to the Soviet Union, which treated then-neutral Finland as its favorite non-Communist trading partner. But following the Soviet collapse in 1991, Finland fell into deep recession, with its economy contracting by 3.3 percent in 1992 and by a further 1.1 percent in 1993 (Kandell, 2001).

The late 1980s and early 1990s were dark years for Nokia. Its CEO, Kari Kairamo, who had led the company into consumer electronics, committed suicide in 1988 after suffering repeated bouts of depression. Nokia television sets, video recorders and computers racked up disappointing sales 8 For comparison, in Sweden Ericsson accounts for 0,8% of Swedish GDP (The Economist, 2001)

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figures. Only the mobile phone division, under Jorma Ollila, a London School of Economics graduate and former Kairamo protégé, was doing well by 1990 after several money-losing years. Ollila had been lured in 1985 from Citibank because of his expertise in international financial markets; he became Nokia's CFO a year later. As a reward for turning around the mobile phone division, he was promoted to CEO in 1992.

Ollila immediately embarked on a radical strategy to rid Nokia of all its businesses except mobile phones and their infrastructure systems. Today mobile phones account for 70 percent of revenues and more than 80 percent of net profits at the company. Infrastructure networks -- the base stations and software that Nokia sells to telecom operators to create their own mobile networks bring in the remaining profits.

The focus on mobile phones turned out to be the best decision Nokia ever made. From a company worth less than $600 million in 1992, Nokia multiplied its market cap an astonishing 500 times over the next eight years -- a growth rate even faster than Microsoft's. At its peak in June 2000, Nokia was Europe's most highly valued company. It now ranks third, behind BP and Vodafone Group (Kandell, 2001).

Finland is now often referred as Nokia land, but is really Nokia so important for Finnish success? Can we ask ourselves, is this just one company that used a good macroeconomic climate and skyrocket its share value? If we refer to a text written above - probably not. Essential for company is access to fresh capital and this is not possible if financing companies is regulated. So government did take care for the most basic conditions for growth of industrial sector. Important was also education system that was effective and efficient.

Application of Porter’s model into Finnish economy gives us clear result. Finland is in the third stage – innovation and creation of unique value are drivers of Finnish society. High involvement of Nokia on Finnish economy is potential threat, but most forecasts for Nokia are bright.

3.4 Slovenia

Slovenia was part of the Habsburg empire from the 14th century until 1918. Nevertheless, Slovenia resisted Germanizing influences and retained its unique Slavic language and culture. In 1918, Slovenia joined with other southern Slav states in forming the Kingdom of Serbs, Croats, and Slovenes as part of the peace plan at the end of World War I; in 1929 country was renamed into Kingdom of Yugoslavia. After WWII Yugoslavia became communist oriented, and during this era, Slovenia became Yugoslavia's most prosperous republic, at the forefront of Yugoslavia's unique version of communism. The tensions between republics in Yugoslavia had in Slovenian case resulted in referendum in 19909, and on June 25, 1990, the Republic of Slovenia declared its independence. A nearly bloodless 10-day war with Yugoslavia followed and after that, period of restructuring and growth for young independent Slovenia have started. (CIA, 2002)

Slovenia was the northernmost republic of the former Yugoslavia and was its most prosperous and developed region out of many reasons. It was historically attached to the west and operated under

9 on December 23, 1990, 88% of Slovenia's population voted for independence

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a different philosophy than rest of the Yugoslavia. Entrepreneurial spirit was quite high and it is astonishing how successful the entrepreneurs in Slovenia were. Slovenia developed at a faster and more intensive pace than the other former Yugoslav republics. If we look at the numbers (Jaklič, 1997): The unemployment rate was much lower than in other republics. In 1989, the unemployment rate was 3.2% while it was 14.0% in Yugoslavia (Potočnik et al, 1996). Employed per 1000 inhabitants were in Slovenia 437 and in Yugoslavia 290. Share of industry in GDP was 47.1% in Slovenia and 44.6% in Yugoslavia. Net wage per employee was 409 in Slovenia and 278 in Yugoslavia. Slovenia have been most developed region in Yugoslavia so economy has been performing well. But Slovenia had much different political system then other two countries.

Capital assets were formally owned by the collectivity of citizens through social ownership and managed on their behalf by the employees of the enterprises in self-management firms. The lack of well-specified ownership rights led to an inefficient industrial economy in which levels of output and productivity were falling throughout the 1980s and in which chronic inflation and continuous currency depreciation were persistent features (Bartlett, 2000).

Long period of economic decline, dissatisfaction with economic performance and disagreements with economic policy were ending for Slovenia with creating its own country. That caused a lot of problems. Slovenia inherited substantial internal (hyperinflation) and external (high foreign debt) imbalances from former Yugoslavia. It lost the former Yugoslav markets, had no foreign exchange reserves to back up its newly introduced currency, and only began to adopt an outward-looking, export-oriented development concept which necessitated the liberalization of foreign trade to create an internationally compatible price system as the allocation criteria. For all of these reasons, macroeconomic stabilization and liberalization were the absolute necessity and top priority of Slovenia’s early transition (Mrak, Rojec, Potočnik, 2002).

Anyhow, Slovenia has been successfully with macroeconomic stabilization and liberation and growth was slowly began. Since 1993, the positive effects of stabilization policies, trade reorientation and industrial restructuring have begun to be felt and the economy has turned around and begun to grow again. In 1993 the growth rate of GDP was 2.8% and has been above 3% in each subsequent year, reaching 6.5% in 1998 (Bartlett, 2000).

Slovenian industry policy hasn’t been focused into an industry as were Finnish and Irish but has a different mission, too often supervised by the political consensus and not by the interest of Slovenian industry. In the past decade Slovenia has moved quickly to establish macroeconomic stability and initiate the systematic transformation of its economy. The main objective of this process has been to generate sustainable growth and to increase the country’s international competitiveness to the level allowing its successful integration into the EU. Although significant progress has been made, Slovenia’s economy still suffers from persistent structural weaknesses. In the enterprise sector, most privatised companies still have to establish corporate governance and undertake offensive restructuring. The country’s financial sector is also still far away from being internationally competitive either in terms of its soundness, efficiency and costs, or in terms of its product variety (Mrak, Rojec, Potočnik, 2002).

As we applied Porter’s model to the Finland and Ireland and we had example of third stage economies, Slovenia is lagging behind those two countries. Slovenia is one step behind and is in investment-driven stage. In the Irish case most important factor for positioning them into third stage

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was high GDP per capita. Slovenian GDP per capita is much higher than of other second-stage countries. In that context we could manipulate, that perhaps Slovenia is entering third stage – however, Slovenia have to go a long way to innovation-driven economy.

4 GOVERNMENT & COMPETITIVENESS STRATEGY

4.1 GOVERNMENT EFFICIENCY

Comparison of industrial policies of three countries can be done through WCY, the chapter on Government Efficiency describes exactly the same issues: state intervention on business activities, how government provides macroeconomic and social conditions, flexibility of the government on changing international environment and how government provide educational resources for knowledge-driven economy. Overall index of Government Efficiency can give us frame where countries are:

Table 2: Overall index of Government efficiency

1999 2000 2001 2002FINLAND 3 2 2 2IRELAND 9 5 3 5

SLOVENIA 45 45 44 43Source: IMD World Competitiveness Yearbook 2002

As we can see from Table 3, both Finland and Ireland are ahead of Slovenia, actually the gap between countries is huge. Countries rankings are not changing through years and they hold their positions10. That is only a confirmation of individual country’s assessment, that Slovenia had in past years different priorities than those Government Efficiency/industrial policy related. We can look at the comparison for three countries and look at the best/worst sub factors:

Table 4: Best and Worst sub factors of three countries

FINLAND IRELAND SLOVENIAOverall/gover.efficiency 2/2 10/5 38/43BEST 1 Business legislation[1] Fiscal Policy [5] Public finance [26]BEST 2 Education [1] Business legislation[7] Education [26]WORST 1 Fiscal Policy [28] Public finance [28] Business legislation[47]WORST 2 Public finance [14] Institut. Framework [9] Fiscal Policy [45]

Source: IMD World Competitiveness Yearbook 2002

10 While Ireland and especially Finland can be satisfied with their position, that is not (or should not) be case of Slovenia

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First row of the table gives us a review on competitiveness of government. If the government is actually leading country’s performance, or government is lagging behind rest of country. In Finnish example is clear, that they are good in overall competitiveness and in government efficiency as well. Irish case is example, how can government lead the country - industry, because government is more efficient than other sectors. That is confirmation of successful Irish policy. Opposite example is case of Slovenia. The index is confirmation of unsuccessful Slovenian policy.

We can see, that Ireland and Finland have high ranked Business Legislation – worst Slovenian sub-factor. Since both countries are in EU this could be a consequence of common European legislation, but both countries recognized before entering European integration, that effective Legislation is one of the first steps in creating stimulating business environment. In next section it is described how foreign companies in Slovenia need at least eight authorizations before they can begin with operations. This result should be alarming, because this competitiveness analysis is another indicator of importance of this topic. Business legislation is first touch that some foreign company have with country that wants to put FDI or other kind of cooperation. Counterproductive business legislation is also handicap for home country industry, because it kills entrepreneurial spirit. Instead of thinking about innovative solutions potential and present entrepreneurial have to cope with Business legislation.

Finland surprisingly ranks low on Fiscal Policy. Finnish Ministry of Finance11 comments this as a consequence of heavy taxation of labor relative to others industrial countries. But this is not considered as a problem in Finland, since they follow Scandinavian welfare system of equality, and heavy taxation is considered as price they pay for fair social system. So their Fiscal Policy is just a stone in mosaic of successful country.

In Ireland is non-consistent with others Public Finance, which is actually even lower than the Slovenian grade. Public Finance in Ireland is a big problem because they have big problems with maintaining social consensus and establishing wage norms. Ministry for Finance12 wants that public expenditure, particularly wages, should be held to budgeted levels, and that fiscal policy should, at a minimum, be neutral in 2003.

11 (Finish Ministry of Finance, 2002)12 (Department of Finance Ireland, 2002)

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Table 5: Government efficiency sub factors ranks for year 2002

Public finance Fiscal policyInstitutional framework

Business legislation

Education

FINLAND 14 28 2 1 1IRELAND 28 5 9 7 9SLOVENIA 26 45 39 47 26

Source: IMD World Competitiveness Yearbook 2002

Government efficiency sub factors tell us the same story as we heard before. Slovenia is lagging a lot, and we can see that only in one field (public finance) we are a head of Ireland, but since this is best Slovenian factor and by far worst Irish factor it is not something Slovenia could be proud on.

When we consider Government efficiency we can not by-pass corruption. Corruption is one of the cancers of most Government systems, and it hurts mainly small people, the one, that often need help most. Comparison of data about corruption are mostly consistent with overall country performance. So we could expect Finland being first, Ireland behind and Slovenia far away. Following table gives us a individual country score on corruption

Table 6:Corruption index of three countries

Rank CountryCPI 2002

score13

1 Finland 9.723 Ireland 6.927 Slovenia 6.0

Source: Transparency, 2002

Finnish result is not surprising. Since Finland has best scores at most of international comparisons concerning economical or related topics, low corruption level is consistent with other measures. On the other hand Ireland and Slovenia have somehow different than expected results.

Ireland has not a score that would be expected. They ranked at 23 place and for one successful industrial country that is not a good sign. In Ireland corruption is present and also very exposed in media. In recent years they had many anti-corruption tribunals and one of accused has been also ex prime minister14 who has been at position for more than 10 years. The high growth is considered as Irish government best result, political corruption is definitely one of the worst:

Ongoing judicial investigations into past political corruption, initiated by the present government in 1997, have revealed a culture of cronyism, sleaze and tax evasion that pervaded Irish politics throughout the 1980s and early 1990s. A picture has emerged of a “golden circle” of senior politicians, wealthy businessmen and well-connected property developers at the helm of Irish public

13 CPI 2002 Score relates to perceptions of the degree of corruption as seen by business people and risk analysts , and ranges between 10 (highly clean) and 0 (highly corrupt).14 It has been established that Charles Haughey took money worth some $10m from private sources during his tenure as party leader and head of government, and failed to pay tax on any of it ( The Economist,2001)

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policymaking for almost a decade, particularly under the leadership of the now disgraced former Fianna Fail Taoiseach, Charles Haughey (The Economist, 2000).

Slovenian position is actually not bad, because it have best score if we consider just candidates for European Community, and is ahead of even some EC countries. That doesn’t mean that corruption is not a problem in Slovenia. Estimates are that with changing of the political system into market oriented economy and related change of values level of corruption increased. Slovenian government had sensed the danger of corruption and reacted with establishment of Agency for preventing corruption15.

4.2 COMPETITIVENESS POLICYIn all three studied countries government plays important role. Approaches are not the same,

but there are certain fields, that competitiveness policy usually stresses: o Subventionso Internationalizationo Educationo R&Do Creating favorable business environmento Promoting entrepreneurshipo Cluster development

Industrial policy sets the operating environment of private sector. Its main goals are: (1) to guarantee the functioning of a free market, and (2) to create advanced and specialized factors of production (Rouvinen, Yla.Anttila, 1997). Public market intervention is justified if there is a clear market failure. Externalities are one of the reasons why a competitive market may not reach a comparatively efficient outcome. Apparent examples are education and basic research: a higher knowledge level increases national wealth as the value-added content of production increases, but these investment are not necessary relational to a business enterprise due to the mobility of labor. Industrial policy can be used to improve the operating environment and factor conditions, but the market decides which companies survive. If we go from point to point of actions of Industrial policy:

1) Subsidies and compensatory policies are not tools of a modern industrial policy maker. It has been proven that they are usually used to protect established but uncompetitive industries, thus postponing the necessary and natural restructuring (Rouvinen, Yla.Anttila, 1997). However, especially before 1980 Ireland has extensively used tax cuts and different kinds of subsidies to attract FDI. Subsidies and compensatory policies are present in large scale in Slovenia too, with a purpose of keeping social peace (having workers employed o the budget expense)

2) Support to internationalization of companies have various functions. One important is knowledge flow, and countries have different perceptions on internationalization. Here Finland and Ireland have big advantage in comparison with Slovenia, because as a member of EU internationalization is much easier. Slovenia understand internationalization as entering Eastern markets. That is better than nothing, but knowledge flow is minimal, since those markets are non-demanding.

15 http://www.sigov.si/vrs/slo/ministrstva/urad-za-preprecevanje-korupcije.html#1

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3) Promoting entrepreneurship supports mainly underdeveloped regions, because big companies are normally clustered in an limited parts of the country (normally around capitals), and with entrepreneurship emigration of workers from less developed regions to country hubs is less active, and gives them good alternatives.

4) Developing clusters is recent trend and is based on interactions and interconnections between firms (and other institutions) in economy. Product and information flows between firms and industries are important. For effective and efficient flow trust in society is crucial, and this is real problem in Slovenia.

5) Investments in R&D and education are driving force of global society. With knowledge people can be innovative and create unique value. Innovation Driven economy is a goal of every country (third stage of Porter’s mode).

6) Reducing bureaucracy is a big problem in Slovenia, because Legislation is not written in an way that would make procedures easier an more user friendly. Here are Finland and Ireland far a head of Slovenia. Bureaucracy is not value-added if is optimal, but can be hindering a lot if not.

4.2.1Finland

The government had played an important role in Finland’s industrial development, but it hasn’t intervene as much as other European governments. Finnish government traditionally do not regulate industry:

In the late 1980s, Finnish industrial policy continued to be considerably less interventionist than the policies of most West European countries. The government's strategy for industries that were having difficulty favored rationalization and restructuring instead of subsidies. Industry was encouraged to step up investments to increase productivity and to arrange mergers with domestic and foreign interests to increase efficiency. Policy makers argued that industry, as a small sector (compared with that of many other countries) open to private investment but dependent on exports, must adjust to international conditions (Solsten, Meditz, 1988).

Despite this hands-off approach, the government did subsidize research and development of new industrial technologies (through its agencies as TEKES and SITRA). Recent political situation follows the growth orientation of the country, because they achieved broad political cooperation with contributions of all sides – labour market organizations as well. Especially those labour organizations were important, because unemployment is historically big issue in Finland.

In the end of eighties, beginning of nineties, the biggest problem in Finland was high unemployment, and government had a goal to solve this problem with growth and diversification of production structure. They started with export growth strategy. That strategy is like a pattern of all Nordic countries:

Great export dependency of Nordic countries and their sensitivity on changes of world economic position are setting the frame for political and economical decisions. Few Nordic countries had tried to reach growth within closed borders, but there has been no results(Jaklič, 1999).

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Finland had clear strategy what to do, but important part is how to do. How to execute strategy that will bring results as wanted. In Finland the answer is TEKES and SITRA – Finish government supporting agencies.

TEKES , the National Technology Agency of Finland, is the principal organization for implementing technology policy and is subordinate to the Ministry of Trade and Industry. Founded was in 1983, its function is to promote the technological competitiveness of industry. In the last year two thirds of funding was aimed in the form of grants and loans at company research and development projects and one third at university and research institute projects.

SITRA, the Finnish National Fund for Research and Development; is the largest venture capital provider and is an independent public fund established in 1967 and is responsible to Finnish Parliament. SITRA’s operations are mainly financed by income from endowment capital, and the return on the investment operations (TEKES is financed from state budget).

But SITRA goes beyond agencies for execution industrial policy. They are coordinating national interest strategy with long term plans. They are responsible for ensuring a better quality of life for ordinary Finnish people in the future. SITRA has set itself the goal of placing Finland among the three most successful nations in the world by the year 2010.

To reach this goal, SITRA has launched Finland 2015 program. The objective of the program is to develop the knowledge, skills, resources and networks of senior Finnish decision-makers in issues concerning the future of Finnish society. The program is basically national in scope, but approaches its subject from a strongly international perspective. The structure, methods and content of the program are multidisciplinary and take account of all layers of society.

The program is carried out in six courses. The present fifth course set four strategic objectives for Finland to achieve by 2015: Finland is a leader in expertise and innovation. Finland provides an attractive living and operating environment for people and businesses, with

prosperity and competitiveness among the best in the world. Finland is a socially secure and environmentally aware country governed by the rule of law, which

has redefined the content of justice, collective responsibility and sustainable development and the means for achieving them in order to succeed in the global economy and prevent social disintegration.

Finns exercise personal and collective responsibility for their health and their families.

As we have seen on the example of Ireland, TEKES and SITRA have different functions than IDA or EI, but they are supporting same companies, just on different stages of innovation-business development process:

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4.2.2 Ireland In Finland government had relatively low involvement in the Industry and Economy as a

whole. On the other hand Irish government intervention has been more direct and also more historically consistent.

Thus, since the 1950s the government of Ireland has taken an increasingly active role in the management of the Irish economy. Especially significant has been the effort to improve the competitiveness of Ireland through wage agreements that reflect cooperation among government, business, and labour that by the late 1980s had evolved into a successful corporatist approach to the economy(Schmitt, 2000) .

The wide political consensus can be compared with Finish one, because they also managed to overcome traditional left or red wing political parties coalition with another rainbow coalition with same goal Irish progress or ‘eradication of poverty’.

.Since 1958, there were three basic elements in the Irish economic policy: provision of

economic incentives and low corporate tax rates to induce industrial development and investment, transition to free trade, and -- the main cornerstone of Irish industrial policy until the mid 1990s -- attraction of MNCs (mostly American) to locate export-oriented manufacturing activities in Ireland (Breznitz, 2002).

The main mission of government support to Irish growth was transformation from agricultural society to industrial society. This policy has been executed through agencies EI and IDA, but later there was a need of bigger support to those agencies, so government establish an coordination and advisory agency FORFAS. Very influential report prepared by this new agency was Culliton report (1992), a report on success of implementation of industrial policy.

The Culliton report’s most important recommendation was that the state should direct its assistance into fixing general financial market failure, i.e., helping companies in every field that were

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Growth/GlobalisationPre-incubation Incubation Development

Association of Finnish inventions

TEKES TEKES and SITRA

SITRA and Finnfund*

* Finnfund focuses on overseas joint ventures

Figure 5: Stages of innovation-business development process


deemed too risky to be granted finance from existing conservative financial institutions(Breznitz, 2002).

Ireland is currently enjoying the benefits of a period of sustained economic growth, which has boosted ICT investment and new job creation. As Irish economic prosperity continue to rise and rates of unemployment decline, they are faced with new challenges, if they want to fortify their position on third developmental stage: developing regional areas and speed up new technological centres in sub-urban areas, in such a

manner that they will assure stimulating working environment and challenging business environment evenly across the country,

re-positioning Irish industry higher up the economic value chain through promoting entrepreneurial spirit and fostering growth of indigenous industries

Ireland need to address a growing skills shortage - A Study of the Northern Ireland Labour Market for IT Skills (2000) suggests that over 90 per cent of participating firms cited the lack of persons with the required technical ability as important in explaining these unfilled vacancies. In addition, a lack of people with sufficient experience of working in IT organizations was cited by 85% of firms. While the same study suggests that shortages are unlikely for IT graduates over the next five years as long as enrolments continue to grow at their current trend rates. (internet 22)

Irish industrial and economic future rests in becoming an innovation-driven economy focused in development commercial ICT products.

If a discussion about Finns Industrial Policy is not possible without mentioning TEKES and SITRA, Industrial policy in Ireland is executed by IDA and EI. They both have clear priorities, IDA for attracting FDI and EI for Irish indigenous industry.

As we seen on History section, Ireland started its policy of FDI in the 1950s, so they soon established an agency with name IDA (Investment and Development Agency), which is one of the most important players in Irish success. Companies came into Ireland for the reasons stated above16, and also because of enthusiastic encouragement of IDA. The agency provide for multinational companies what they wanted:

As companies began to roll into Ireland, they demanded improvements, and the IDA pushed to develop better roads, reliable power, up-to-date phone systems, access to airports, shipping facilities, and modern industrial parks and buildings (Borrell, 2002).

IDA had a very simple goal: create a base of manufacturing jobs in Ireland. They achieved the goal with encouraging new investment from overseas in manufacturing and international services sectors and with encouraging existing MNC to expand. After a success of IDA, government recognized the need to cerate a parallel organization for developing indigenous industry. They established Enterprise Ireland - agency, that cover education, taxation and government policy from the perspective of an enlightened industrial policy.

Both agencies had access to government funds to promote their goals. EI can provide start-up capital (up to 10%) – in return for share in company’s equity. EI is playing important role in Irish entrepreneurial policy.

16 Most important reasons were young, well-educated English speaking workforce and improved infrastructure,

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4.2.3SloveniaSlovenian government had different problems, because since independency in 1991, there

were other priorities as growth. At the beginning of independent country, Slovenian government policy has emphasized a mix of support for privatisation and restructuring of large-scale enterprises, and the entry of new small firms to develop private sector. Very important player in the field is development Fund:

The state continues to support the large –scale sector undergoing privatisation and restructuring through the activities of Development Fund. This is probably essential in a transitional period at least to gain legitimacy and political support for the new regime. The danger is that such support could ossify into a permanent state involvement in the interests of maintaining employment of existing insiders (Bartlett, 2000).

The general impression is, that Slovenia was successful in the restructuring phase and same conclusions has also at the WTO report: The reform program in which Slovenia embarked since independence in 1991, aimed at restoring macroeconomic stability and establishing a functional market economy, has created a modern, stable, outward-oriented economy, well integrated into the world economy (WTO, 2002). Slovenia had very high and constant growth in past few years (after 1994), but now this growth is slowing down:

Economic developments in 2001 were characterised by the slowing down of economic activity; economic growth was below the average level of the last few years but still substantially higher than in EU members. The slowdown was the result of external and internal factors: lower growth in foreign demand and the slowly rising domestic consumption, particularly investment (UMAR, 2002).

As we have mentioned TEKES, SITRA, IDA and EI as executors of industrial policy in their countries, actually the main force for top down approach (where government is stimulating companies), we have to mention also Slovenian Industrial policy tool. But in Slovenia the Industrial Policy doesn’t have such heritage as in other two countries, and there is no Agencies as have been described above. Anyhow, under Ministry for Economy there is institution with similar mission :

Like all developed countries, Slovenia has an institution responsible for attracting inward direct investment. The Slovenian Trade and Investment Promotion Agency (TIPO) has the mandate to engage in activities tailored to win FDI and assist in the process of internationalisation to be enjoyed by Slovenian companies (www.investslovenia.org)

TIPO can not be compared with Finish and Irish agencies although they have similar mission. The amount of foundation is clearly a sign, that TIPO can not be only provider of support to enterprises in Slovenia, but this is a start. They have few employees (currently around 10), but comparison could be made considering companies that they support – comparison with Irish agencies. As they have IDA for foreign companies and EI for indigenous industry, also TIPO is divided on two parts, supporting of FDI and internationalisation of Slovenian companies. Internationalisation part seems to be more important, because in year 2001 it received 1/3 more funds than support of FDI. It is very hard to say that TIPO should receive more money (directly from state budget), because total

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agency realization of funds in 2001 has been 77%, that means that more than quarter funds has been transferred into year 2002.

TIPO have additional problems with FDI concerning low competitiveness of Slovenia. There has been study made as a comparison Central-Eastern European Countries for a specific case. Analysis has been made by McKinsey advisory group for French-Japanese car making Joint Venture 17. The analysis had two different criteria, NPV of project and qualitative assessment of economic environment in a country. Slovenian position was 6, lagging of Czech, Slovakia, Poland, Hungary and Estonia.

4.2.4ComparisonIf we compare Finland and Ireland, we can see common denominator: focus. They figure out

what is their distinction from others, make a strategy, process it and stayed focused on it. In Finish example that was R&D in Irish example FDI. They didn’t succeed at once, especially Ireland need about forty years, that its FDI policy bring results. So comparison of Industrial policy as such will not tell us a lot, more important is comparison, how countries succeed to transplant policy from paper to tangible growth of the country. For that reason, let us focus on comparison of country’s Agencies.

Table 7: Comparison of countries developing agencies18

Country Ireland Finland SloveniaName IDA EI TEKES SITRA19 TIPO

Number of supported companies

1237 21020 2261 121

Amount of foundation

€109m €186m €387m €106m €0,3m

IDA is agency, that supports new FDI and also encourages existing foreign enterprises, so 1237 supported companies is actually very close to total number of Foreign companies in Ireland. EI on the other hand have mission to support indigenous industry: Irish companies and international businesses of Irish companies. We can see, that 70% larger amount of funds goes to indigenous industry, and that confirms government mission of strengthening indigenous industry.

As IDA and EI are supporting agencies for industry, in Finland the organizational structure is a bit different. TEKES invest funds mainly to R&D in both, universities and companies. With this agency Finland improves its competitiveness21. So they do not give funds to a company as a whole as Irish agencies, but they are funding companies R&D sectors. On the other hand SITRA is more like Irish agencies and supports joint-ventures, start-ups and other companies in Finland. Data on 17 from TIPO 2001 annual report18 All data are for year 2001 (IDA,2002);(EI,2002);(TEKES, 2002);(SITRA,2002);(TIPO,2002)19 For SITRA information is from Investment portfolio20 number of significant projects21Tekes' primary objective is to promote the competitiveness of Finnish industry and the service sector by technological means. Activities aim to diversify production structures, increase production and exports, and create a foundation for employment and social well-being(TEKES, 2002).

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supported companies are showing us, that TEKES is actually much bigger institution than SITRA, but in Finland they have various parallel companies to SITRA. Anyway their strategic focus on R&D is clearly seen (TEKES have close to four times funds as SITRA).

All three countries is hard to compare, but agencies from Finland have more funds than those in Ireland (according to available data), but this is reasonable, because GDP of Ireland is lower that Finish. Efficiency of both countries agencies can not be directly compared but we can manipulate, that Finish are more effective, since Finland is more competitive in both, Overall Competitiveness and Competitiveness of Government efficiency (Competitiveness Yearbook).

4.3 PROMOTING ENTREPRENEURSHIPGovernments realized, that entrepreneurials are important leaders of development, and that

focusing on large enterprises is not benefiting as large population as focusing on SME’s does. In European Union there is much stress on local economic development and regional policy (clusters are mentioned in the next part), especially promotion of endogenous growth mechanisms, such as entrepreneurship, social networks, synergy, innovativeness, dynamic learning processes and factor flexibility. Promotion of entrepreneurship is government mission and normally includes (six objectives of Promoting Entrepreneurship):

- reducing barriers to entry- promoting an entrepreneurship culture- entrepreneurship education- start-up business support measures- access to seed and start-up financing- identification of target groups

Special importance is creating of widespread awareness of entrepreneurship in society, to increase its legitimacy. Important issue is also readiness of society. Let us look at the individual country’s entrepreneurial position.

4.3.1FinlandFinland is one of the most entrepreneurial countries in EU, as many authors recognize. United

States are ahead of Europe, but Nordic countries, especially Finland are ahead of rest of Europe (Bildt, 2001). Entrepreneurial spirit had good environment in Finland. Infrastructure, government (R&D) support and also open society, social networks and other knowledge flow predispositions. Finnish history was mad mostly by the big enterprises (forestry industry dominated), and there were not a lot of chances for developing SME’s.

Although the Finnish government has been sensitive to the needs of the SME sector since the 1970s, its firs SME Policy Program was introduces in 1993. This was in response to recommendations outlined by the advisory Committee for Small and Medium-Sited Enterprise, a committee set up by the Minister of Trade and Industry to provide advice on ways to develop the SME sector(CHAPTER TWO).

As we see, the Program was successful, interesting about it is especially cooperation among different institutions. They were able to connect Ministry of Trade and Industry with nine other

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ministries and with regional authorities (Association of Finnish Local and regional Authorities) as well22.

4.3.2 IrelandIn Ireland they had different philosophy for growth than in Finland. While Finland stressed

education, innovativeness and R&D had Ireland policy of FDI. Problem is, that MNC are not very supportive to SME’s. They cooperate in certain level, but this level dose not include creation of unique value or other high value-added activities. That is a problem, because growing sectors are not those sectors that employ most of the people. Government did realize this problem and tried to stimulate indigenous industry. The result was creation Enterprise Ireland, agency for supporting Irish industry.

The 1982 Telesis Report23 called specific attention to the SME sector in Ireland. The government responded with a range of programs to improve the competitiveness of indigenous forms, including a Small Industry Program. This program has been made, but industrial policy has been neglecting entrepreneurial. After Telesis report there were policy towards indigenous industry should be somewhat more selective, in the sense of aiming to develop larger and stronger firms , rather than assisting a great many firms indiscriminately. But trends of European Union towards Entrepreneurship have been felt also in Ireland.

Ireland promotes Niche entrepreneurship policy, that means that government formulates targeted entrepreneurship efforts around specified groups of population. Objective of this policy is generating high-growth potential business based on R&D, technology or knowledge inputs (Chapter two). Here is a distinguishing point with Finland, because Finns are implementing Holistic Entrepreneurship Policy, that is approach that is encompassing all six objectives of Promoting Entrepreneurship stated in introduction of this subchapter.

4.3.3SloveniaIn Slovenia there are few new dynamic enterprises that would have the potential of achieving

a leading position in individual global niches through their capacity for innovation24. One of the reasons for this is certainly relatively slow restructuring in existing enterprises. However we cannot, of course assign blame for this situation exclusively to managers of large and old enterprises, nor to entrepreneurs in smaller enterprises. The developmental challenge that lies before Slovenia demands

22 Horizontal or multi-ministerial approach23 Irish opposition comment on Telesis report (Freespeech, 2002): This report, known as the Telesis Report, contained information so devastating that publication was delayed for over a year. A few of the main points were: 1.Only about 30% of the jobs announced by the IDA ever actually materialized. 2.Jobs created by foreign industries at great public expense failed to make up for jobs being lost in traditional Irish industries, so that despite continued large-scale emigration unemployment continued to rise. It had been expected that the multinationals would use Irish firms as suppliers and sub-contractors. This had not happened, in fact they imported their raw materials and exported their products and the country got only the rather low wages of their employees. 3.The foreign firms did not engage in research and development work in Ireland, despite inducements to do so. The report was the subject of lengthy but inconclusive public debate. On item three, the multinationals made the reasonable response that they had found native Irish firms incapable of working to the standards required by a modern enterprise.

24Good example of such company is Akrapovic, they started 12 years ago with ten employees, now they have more than hundred employees and are one of the top motorcycle exhaust systems manufacturers – with application of its own knowledge and capabilities (Akrapovic, 2002)

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the coordinated operation of many elements in the system. Developers in the biggest enterprises, among which some already dominate world niches that the international market or division of business activity accords higher added value, and they need to appropriately support the environment for the development of new technologies, products, services (Jaklič, 2002)

Since Slovenia is young country, without legacy of western type entrepreneurial knowledge, vital for promotion is education. That potential entrepreneurial should be familiar with opportunities that are in this developing sector. That does not mean establishment of all kinds of Entrepreneurial schools with questionable knowledge-added, but effective and efficient learning-by-doing programs. But Slovenia is in a better position as rest of Transition countries, because their Soviet-type communism didn't allow entrepreneurship in the past, while in Slovenia entrepreneurial have actually being on a relatively high level. But changing of the system emerged restructuring and that brought a lot of troubles.

The initiation of SMEs, is not easy, and their growth even more difficult. For that reason Slovenia has currently only a very small number of enterprises which is recognised to be “gazelles” and the public attitude is that this structural deficiency is far from being improved. The share of those employed in enterprises with 10-100 employees was 10% in 1993, while it is 40% to 70% in the developed world. In Slovenia it is therefore the large size companies, representing only 2.4% of all companies, that contributed the most to the overall business result in 1996. Large size enterprises employed 61.2% of all workers, contributed 63.2% to total revenue and 78.4% to total net revenue from sales on the foreign markets. The contribution of medium-sized companies even decreased from the year before (Jaklič, 1997).

Entrepreneurship education is without doubt vitally important for the promotion of entrepreneurship in any country which would like to enhance the building of small and middle size companies. This is especially true of all the states which have been established as a result of the collapse of the former socialist countries (Tajnikar, 1992)25.

4.4 DEVELOPING CLUSTERSCountries are increasingly realizing that competitiveness of a nation originates from

interactions and interconnections between firms (and other institutions) in economy. Clusters represent these unique combinations of firms.

Ever since Porter’s (1990) classical work on Competitiveness of the nations, countries are realizing that competitiveness of a nation does not originate from single companies but from unique combinations of firms tied together

In his classical study Porter (1990) argues that successful firms are seldom alone. Frequently a company’s dominant market share and accelerated growth are supported by a unique combination of firms tied together by knowledge and production flows. Competitiveness originate from these unique combinations of firms – clusters or industrial districts. They are agglomerations of usually smaller companies, locally embedded and specialized in few interrelated economic activities. Clusters are defined based on product and information flows between firms and industries. Geographical proximity 25 Maks Tajnikar: Characteristics of entrepreneurship in the post socialist economy (Slovenia) and the demand for entrepreneurship education; June 23-26, 1992.

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is typical of clusters – although it is not absolutely necessary. The agglomeration of many participants, some of which are also public and research institutions, creates many externalities: specialized factors of production are more readily available, new innovations are easier to come by due to active interaction and technological spillovers are virtually unavoidable. The main idea is that a cluster is considered to be better equipped to succeed in the market place than in isolated company.

In come places like Northern Italy, USA (Silicon Valley) or Great Britain clusters arise and evolve by themselves. In most other countries only embryonic clusters exist. They have the potential to evolve into full clusters but have not yet developed deep mutual ties and interconnections. Government can help embryonic as well as existing clusters to develop themselves by educating participants about benefits of clusters, formalizing networks, creating opportunities for knowledge sharing and awarding research grants to groups of companies instead of single company. Because of existence of significant externalities, these actions are justified and do not distort market mechanisms.

4.4.1Finland

Finland was among the early adopters of cluster approach to improving competitiveness. During economic crisis in the early 1990 it realized that policies used earlier to promote industrial activity were inappropriate in the new, more global and less restricted environment. Findings from comprehensive “Competitive Advantage Finland” project revealed that it has only few successful firms and industries and that the economy has been dominated by few large companies (Rouvinen, Yla-Anttila, 1997). At the same time potential clusters and their relative strengths as well as growth opportunities were identified. Those clusters were: forest, base metal, telecommunications, well-being, environmental, transport, chemical and construction clusters.

The Ministry of Trade and Industry used the cluster concept as the cornerstone of its new industry policy thinking. The links between enterprises and business sectors underlined by the clusters, the overall role of the business environment in the country and its various regions in developing clusters and especially the contribution of know-how and technology to the success of clusters – and, on the other hand, the insignificance and harmfulness of supporting one single enterprise or business sector – depicted well the line of thinking that had become stronger in Finnish industrial policy since the mid-1980s.

Clusters proved to be a convenient framework for whole range of policies, from regional development and heath care to science and technology. Government concentrated mainly on developing forest, food, ICT, and welfare clusters (Petarinen, 2001). The most significant application of clusters has, however, been in technology policy. TEKES was very active in developing cooperation between research institutes, large companies and SMEs. Cooperation has often been a precondition for a project’s eligibility for financing. Such a “cluster” or “network” approach to technology financing is, as far as is known, unique and it has been considered an important element in the success of technological development in Finland. Therefore, the cluster approach has in fact become an integral part of technology policy rather than remaining a set of well-defined cluster specific policies (OECD, …). (for more about technology see section innovation systems).

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4.4.2 IrelandOne of major problems of Irish economy and it’s industrial policy was lack of quality linkages

between highly sophisticated foreign MNC and indigenous domestic industry. In the early 90’s, influenced by Porter’s research, a major review of Irish industrial policy was instigated. The findings were summarized in the highly influential “Culliton” report (1992). The report recommended that policy should aim to develop groups or clusters of related industries, building on sources of national competitive advantage. The government tried to identify industries which could achieve global competitive advantage not only as low cost supply chains to multinational operations but also as high skill, knowledge-intensive clusters combining the advantages of small firm flexibility with the economies of scale generated by collective learning and collaboration (Clancy et al, 2001). Cluster promotion and support in Ireland become one of the objectives of FORFAS and Enterprise Ireland agencies.

However, successful clusters in Ireland have taken a very different form from that envisaged in the Porter model (O’Malley and van Egeraat 2000)26. First, they tend to be oriented to global markets, and provide little evidence of the domestic rivalry that supposedly acts as the springboard for international competitiveness (O’Donnell 1998). Second, the clusters are largely driven by the multinational firms themselves, which in turn have been embedded in the local economy by skills upgrading, industry policy and the increasing sophistication of the indigenous sector itself27 (Bergman and Feser 2001).

National Economic and Social Council (Clancy et al., 2001) suggests that clusters development in case of Ireland should be focused on three priorities. (1) IDA should concentrate its efforts in attracting MNC that are willing to purchase inputs of goods and services which would be locally produced at Ireland and that would employ a significant proportion of highly skilled labor, particularly employee engaged in R&D. (2) Enterprise Ireland should encourage suitable companies to expand in the groupings (of indigenous companies or with foreign MNCs). The development of interrelated grouping could also be facilitated by providing appropriate geographically concentrated industrial space in complexes designed for specific industries. Support should be offered for cooperative alliance between all level, where institutional interventions, public or private, would function to facilitate cooperative structures and the development of infrastructure for clusters. Example of such an action is National Software Directorate, which has implemented its own form of assistance to the process of building cooperation and alliances between software companies.

To conclude, Ireland does not have many specific cluster policies, aimed at development of certain clusters. It has rather changed the focus of it’s existing industrial policies. On the international front it has focused on attracting MNC that would be beneficial to clustering in Ireland and in the home front it has started to offer more support to networks of companies rather than just individual, large, indigenous companies. It seems that they are trying to achieve a “concentric circle” clustering, similar to Japanese kiretsu networks where foreign MNC would represent focal point, which connects other indigenous enterprises in the tight, knowledge-sharing network. In doing this, they are basically trying to locally embed large MNCs, by combining their great knowledge base and flexibility, adaptability and innovativeness of small indigenous companies in cluster.

26 Basicall, this means that clusters as defined by Porter (1992) are non existent in Ireland.27 Two major (most developed) Irish clusters are software cluster and dairy products cluster.

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4.4.3Slovenia

In comparison with former two countries, Slovenian government has started promoting clusters rather late. In 1999 Ministry for Economic affairs has commissioned a first study of Slovenian clusters. Few potential clusters were identified and three “pilot” clusters (automotive, logistics and machine-tools) were selected for further development. At the same time workshops and various other actions were conducted to inform and educate managers about the importance of networking and clustering, as well as about government’s efforts for promotion of clusters (ITEO, 2000).

Similarly like in Finland, Ministry is granting funds to networks of companies that have proposed shared projects (there has to be at least four companies and one research institution for network to be eligible for funding). It has also provided necessary funds for operations of three pilot clusters.

It is still early to judge success of those actions. On the positive side, inspired by three pilot cluster, some new clusters have emerged. On the negative side, there is great lack of trust between companies in the clusters. As a result of bad experience during communist regime, where companies were forced to “cooperate” in large socialistic conglomerates (Jaklič, 1999) and because of cultural predispositions (for more see section on Society and culture), Slovenian managers are wary of clusters. They do not see benefits of clustering and are prepared only to give and not to take. Besides, Slovenian managers and entrepreneurs are experts in evading taxes and getting government support (Jaklič, Zagoršek, 2002). It is questionable if they have joined together because they really perceive benefits of cooperation or because they just want to make some “easy money” by taking what government is willing to give to them. Thus it is questionable whether those clusters would survive, once the ministry stops financing them.

It seems that major benefits of cluster approach are in emphasizing role of networks and cooperation for competitiveness at various levels of decision-making authorities. Both in Ireland and Finland clusters provided a fresh outlook and perspective on existing government activities. Cluster development was integrated into various government policies and actions. In other words, clusters provided the framework, through which various policies (R&D, FDI attraction, regional development, entrepreneurship) were executed. However, in Slovenia this is not the case. Ministry of Economic Affairs remains alone, because cluster mentality was not adopted by the rest of the government. Unlike in Finland competitiveness and networks are not commonly emphasized by other policy makers. In that kind of environment cluster specific policies can only have limited impact on growth and competitiveness of the country.

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5 HUMAN RESOURCES

People represent the building bricks of countries. On the human resources a country has depends its future and the way the country is going to develop. Under the term human resources we analysed value system that is prevalent among the population, the education system and the nature of the labour market (its regulation and flexibility) of the selected countries.

5.1 SOCIETY: CULTURAL NORMS & VALUESOne of our thesis is that national cultural characteristics are of great importance for a country's

development and economic growth. Trust in the society, attitude toward risk, system of authority and role of individual and his or her attitude toward being a group member are key components of country’s success (Jaklič, 2002).

Religion surely plays a big role in defining country’s value system and thus could be used as a viewpoint for comparing the selected countries. Finland is protestant, whereas Ireland and Slovenia are traditionally deeply rooted in Catholicism. Slovenia has however passed thorough a socialist era, when the ties to the Catholic Church weakened, but anyway the catholic value system remains deeply rooted in peoples minds.

Ingelhart (1997) argued that the protestant value system gave boost to capitalism and high economic growth by the rules of capitalism. Catholicism is not and wasn't a good environment for capitalism to develop. The primary reason why the capitalistic spirit cannot be acceptable to the Catholic mind or to a Catholic culture is on account of the fact that it refuses to reduce "ends," and especially the ultimate end, to the instrumental means of monetary value. For the capitalist the acquisition of money, if done by "legal" means (taking "legal" here in the strictly positivistic sense), cannot be immoral. For Catholic teaching striving for temporal things or monetary values would be unlawful if people seek money or other temporal things as an end or "through too much earnestness in endeavouring to obtain temporal things” (Bible, around 50 A.D.).28

On the other hand Protestantism played a pivotal role in creating the capitalistic spirit. The modern spirit of capitalism sees profit as an end in itself, and pursuing profit as virtuous. One branch of Protestantism, Calvinism, is the source of this thinking. Calvinists believe in predestination--that God has already determined who is saved and damned, and thus works as a means of salvation are useless. This doctrine, in effect, denied the relation between earthly action and eternal recompense. If there was no direct correlation between how I act, whether in the innermost recesses of my soul, in society, or in business and my achievement of or failure to achieve my ultimate supernatural end, then action will no longer be guided by any supernatural motive.

Considering this facts the value system of Ireland and Slovenia should be much less favourable to competition than that of Finland. The IMD rating on factor “values of society support competition” is partly in favour of this (Table 10). Finland ranks very high on the fourth place, whereas Slovenia ranks very low on the 31st place. The relatively high place of Ireland could be attributed to the modernisation trends that have affected Ireland much more than Slovenia, what can be also seen from the scores measuring postmaterialist values (Table 8). In this category Slovenia scores

28 Not to mention the words of Jesus, when he said that “ a rich men will go to heaven, when a camel goes through a needle’s eye”.

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the lowest and Finland the highest. Slovenia was due to the socialist regime left partially out of the modernisation flows that affected west-European countries much more. Materialist and postmaterialist (also called postmodern) values are an important indicator of the social development of a country.

Table 8: Scores of the discussed countries on Cultural variables (Inglehart, 1997)

Finland Ireland SloveniaPostmaterialist Values 33 22 16Subjective Well-being 76 80 23Interpersonal Trust 63 47 17

According to the values surveys made in Slovenia the Slovenians feature some characteristics (Turnšek, 1999):

a materialistic value orienta tion. Such an orientation was especially distinctive in 1992, but in 1995 some changes towards a postmaterialistic (and thus postmodern) values set are already evident

low level of democratic culture - As the research of Inglehart (1997) shows: democratic cultures have typical attributes: high degree of trust in interpersonal relationships, high degree of satisfaction with life, low level of ethnocentrism and extremism, high level of political participation and moderate income differences.

exceptionally high importance of work

On the other hand Ireland and especially Finland made a shift towards the postmaterialist values much sooner. As a fact Finland is among the countries with the most postmodern value set in the World and was the first to make a big shift towards the postmaterialist values (Ingelhart, 1997). Ireland made the shift in the eighties and nineties, whereas in Slovenia bigger changes have occurred as late as in the end of the nineties.

According to Inglehart (1997) some major attributes of the postmodern shift are: People in the postmodern cluster of nations are losing confidence in all kinds of

hierarchical institutions, including government, business, and religion. At the same time that people in these nations are losing trust in traditional institutions,

they are placing more emphasis on personal authority or the authority that comes from an inner sense of what is appropriate.

People feel relatively secure materially, and tend to be more concerned with their subjective well-being than with maximizing their material well-being.

There is a tendency for economic growth to be subordinate to concerns for environmental sustainability,

People from these nations show a greater tolerance for ethnic, sexual, and political differences.

Inglehart views this shift as a rational one, calling it "a shift in survival strategies, from maximizing economic growth to maximizing survival and well-being through lifestyle changes".

Inglehart (1995,1996) demonstrates, that on the world level socio-cultural postmodernisation highly correlates with BDP per capita (r= 0.78), but not with economical growth. One the contrary high levels of economic growth negatively correlate with postmodern value system (r =-0,47). However the reason for this can be sought in the sample, which includes also the least developed countries of the world, some of which have a high economic growth. The evolvement of the postmodern value system correlates with the share of working force employed in the service and IT sector (r = 0.79) and it also correlates with the share of population with at least high education (r =

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0.63). However the highest correlation (0.88) is with the degree and quality of democratisation of society.

The work of Hofstede (1980, 2000), who analyzed national cultures based on IBM employee sample, could also be used to have a look from a different viewpoint on national economies. Hofstede uses a four forces model to describe the national culture variability. Hofstede‘s four forces are:

Power Distanceo The degree to which the unequal distribution of power is accepted or rejected. o Countries that place emphasis on power distance have high respect for authority

and believe that status and rank are very important. Uncertainty Avoidance

o The degree to which people feel threatened by, and attempt to avoid ambiguous situations.

o Cultures that desire to avoid uncertainty are resistant to change, and engage in stabilization practices such as rigid rules, rituals.

Individualism vs. Collectivismo Taking care of yourself and immediate family vs. groups of people taking care of

each other o Good of the person vs. Good of the Group o Implications for personal achievement, fitting in (not sticking out), taking credit

Masculinity/Femininityo Masculine cultures are materialistic and value assertiveness. Adhere to rigid sex

roles (Men in masculine jobs, women in feminine jobs) o Feminine cultures value concern for others and relationships among people

Table 9: Index Scores and Ranks (in brackets) according to IBM employees based research (Hofstede, 1993,2001)

Finland Ireland SloveniaPower Distance 33 (46) 28 (49) 71 (14)Uncertainty Avoidance 59 (31) 35 (47) 88 (8)Individualism/Collectivism 63 (17) 70 (12) 27 (33)Masculinity/Femininity 26 (47) 68 (7) 19 (50)

Based on these results, however questionable due to the sample, we can conclude that Slovenians compared to Finns and Irish are much more collectivistic, feel more uncomfortable by ambiguous situations and much more readily accept unequal power distribution. Especially the first two mentioned forces can play a major role in defining economic performance. Highly expressed collectivism can represent a major obstacle to entrepreneurship and represses competition, since it is socially undesirable to outstand or to place personal benefit in front of or at the cost of collective benefit. High uncertainty avoidance index for Slovenians is in accordance with the IMD 2002 report, which ranks Slovenians very low on adaptability and flexibility when faced with new challenges. Such a national trait could also represent a major handicap, since success in the modern ever faster changing world is dependent on the capability to adapt to new situation. Moreover, Slovenian national culture is also very closed to foreign ideas. This two things combined pose a big question mark on Slovenian capability to innovate.

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Interpersonal trust is a very important factor in building an environment, where people feel secure and where effective and long-term inter-party relationships are possible. Moreover interpersonal trust is not only necessary to safeguard solidarity, it also makes negotiating and cooperating much easier, thereby helping democracy to function properly and promoting economic development and prosperity (Halman, 2002). High interpersonal trust in Finland results also in a high degree of networking, which is not used like in Slovenia for personal interests, but rather for companies’ or common society’s interests. We hypothesise that informal interactions and connections in Finland are one of the important factors that made possible broad social consensus and fostered development. Finns have a culture of summer cottages, where people from all social groups and from all fields meet. Summer cottages and compulsory annual military service enabled communication and played a role at unifying and building interpersonal connections. The importance of this networking is acknowledged also by SINTRA, which organizes meetings with the purpose of networking as already written before.

Slovenians on the other hand have also a well established network, but which is mostly used for personal gains and not for common benefit. This results in a extremely low level of interpersonal trust. Slovenians agree much more with the statement “generally I cannot trust people” than with the statement “generally I can trust people”. The share of those who are mistrustful or precautious was in 1992 and 1995 five to six time bigger than the share of those who trust people. According to the level of trust Slovenia in 1992 ranked 40th and in 1995 at the last 43td place (Turnšek, 1999). This fact can pose a big obstacle to further development, since greater development leaps in such a small country are possible only with collaboration and with an overall social consensus on goals.

Table 10: Scores and ranks (in brackets) of the discussed countries on Value variables (IMD, 2002)

Finland Ireland SloveniaAdaptability and flexibility 7,7 (10) 8,0 (5) 5,6 (43)National culture open to foreign ideas 7,4 (22) 7,7 (19) 6,4 (41)Values of society support competition 8,1 (4) 7,5 (10) 6,1 (31)Quality of life 9,0 (10) 7,9 (19) 5,5 (34)

The neoschumpeterian or evolutionary school of thought tries to explain the innovation process. According to it the performance of individuals, firms, regions and countries depend directly on the capacity to learn and adapt to the changing conditions of technology and markets. In the new “learning economy” the determinants of success are the degree of exposure to change and the capabilities to acquire information and knowledge to build new competencies, or in other words, to assimilate change, learn, adapt and finally produce new changes or innovations. The policy recommendation is essentially to increase the exposure to change and improve the capacity, above all of the weakest in society, to cope with change. The neoschumpeterian model to explain the capacity to learn, points out two elements: degree of exposure and capability to cope (Lundvall in Buitelaar, 2001).

In light of this we can have a different look at the countries. Finland has through all its history been exposed to frequent political and economical changes) and according to IMD report and Hofstede’s research Finns are very flexible and adaptable. History considered, Slovenians have gone through a lot more of political and economic changes and thus should have developed some level or kind of flexibility and adaptability that enabled them to survive through time. However they have

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obviously failed to develop that kind of flexibility and adaptability that would now provide for an outstanding development. Slovenians have interestingly developed a very high degree of flexibility, which is connected with the informal or grey economy. Slovenians have generally never been the leading people, managers or entrepreneurs. Through all the history Slovenians have predominantly been "villains" – peasants, handcrafters, or wage earners in companies owned by foreigners. Since they were never actively engaged in the formalized economy, but were always part of the informal economy, Slovenians developed the skills that enabled them to perform their economic activities under all circumstances. Moreover in spite of lack of trust, social cohesion played an important role in preserving and enabling this activities. It is also possible to explain the relatively successful transition story of Slovenia by the existence of social cohesion, which enables different social groups to play surprisingly identical economic roles continuously despite political transitions (Jaklič, Atlantis valleys).

Slovenians have gained substantial economical independency only after the WWII. In spite of lack of entrepreneurial and managerial tradition they were able to establish the most efficient socialist economic-system in the world.. What was the source of such success? Was it the unified fight against the occupier that gave them the necessary enthusiasm? The question is, where to now find that spirit that was at that time able to push the economy so high.

National cultures are of big importance for the development of countries since they predetermine certain social and personal behaviour that is more or less in favour of economic development. But we should not look at culture as the only predictor of economic growth. Most probably cultural and economic factors play complementary role in economic growth (Inglehart, 1997). We shouldn't look at culture as something unchangeable. Cultures do change, do evolve and a nation is not doomed with it's own culture.

5.2 EDUCATION

5.2.1FinlandOne of the biggest strengths of Finnish educational system is that it is very well suited to the

needs of the economy. According to IMD it is the best suited educational system among the researched countries. To ensure even a better fit of education and economy needs Finland in the nineties restructured its educational system. The polytechnic degrees were implemented, which are higher education (Bachelor level) degrees with a professional emphasis. The starting points for the development of the polytechnic programmes originate in the requirements and development needs set by working life. The basic mission of polytechnic schools is to satisfy the national and regional needs for professionals. On the other hand universities' mission highlights higher education based on research, the promotion of scientific knowledge, and a responsibility for seeing that Finnish research, education and teaching achieve a high international standard in keeping with ethical principles and good scientific practice. (internet 15). A better fit to the economy is also provided by a high percentage of students studying natural sciences, mathematics, computer sciences and engineering.

Finland defines education as crucial to its strategy for the future, which aims at the well-being of its citizens, cultural diversity, sustainable development and prosperity. The watchwords in education policy are high quality, educational equality and life long learning. The government is committed to maintain the high level of public funding to the education and research system and

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special attention is paid to developing teaching and learning at all levels of education through teacher education and guidance services. Finland public expenditure on education measured as % of GDP was in 2000 5,9 and Finland ranked in the middle of the developed countries. However Finland bets more on the quality of its education system that has already in the past been known for its excellence.

The education in Finland focuses on: basic educational security : no tuition fees at any level of education,

students’ financial aid schemes principle of lifelong learning : pre-school education for all, large

provision of education at all levels, targeting educational services for third-age students

internationalization : intensified international cooperation at all levels of education

improving mathematics and science skills : supporting the development of knowledge-based society, sustainable development, business and citizens’ mathematical and scientific knowledge and know-how

rewarding centers of excellence and further developing researcher training: quality through evaluation and competition

strengthening the status of evaluation as an integral part of a steering and development policy emphasizing the importance of quality: monitoring the overall performance of schools and higher education institutions

During the 1990s a great deal of attention was paid to postgraduate education. The graduate schools launched in 1995 have proved an efficient way to lower the age of new PhDs and to produce high-standard experts. The annual number of doctorates has been growing rapidly, and was over 1,000 in 1999. PhDs candidates are clearly younger than before. The challenge is to carry on and further develop these trends with a view to maintaining the high standard and recruiting a sufficient number of competent postgraduate students in all educational fields to satisfy the manpower needs in qualitative as well as quantitative terms.

5.2.2 IrelandAn efficient and high quality educational system is the basis for Ireland’s business strategy. As

the Ireland’s Department of Education and Science states: “Central to Ireland’s future economic and social success is the development of quality and inclusiveness in education as part of a strategy to support lifelong learning with the aim of improving knowledge and skills and promoting personal fulfillment. The attainment of the targets and goals in this regard, will require continuing attention to the quality of learning experiences to ensure access, participation and the achievement of high standards for all learners, irrespective of background.”

Irish government, knowing that people are the basis for growth, has invested severely in human capital. Starting in the 1960's investment in education became a major priority. The introduction of free secondary education in the 60's transformed participation rates and educational opportunity in Ireland. However Ireland introduced free third level education as late as in 1995.

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Since the early 1980s, there has been a significant rise in the level of education of people leaving the Irish education system. Between 1982 and 1997 the annual total of people graduating with a university degree almost trebled from 5,443 to 16,243 graduates. Currently almost half of those leaving the educational system have experienced tertiary education and over 80 per cent have completed the upper cycle of secondary education. The continued increase in educational participation in the 1990s has meant that Irish levels of participation in tertiary education are on a par with other more advanced industrial societies.

Three decades of investment in education has increased the supply of skilled labour while reducing that of unskilled labor. Over the same period the demand for labour has changed, with a substantial increase in demand for skilled and a fall in demand for unskilled labour. Irish government invested in 2000 6,7 % of GDP into the educational system (IMD, 2002). Like Finland Ireland tries to suit the educational system to the needs of the economy and it ranks right behind Finland on the second place (IMD, 2002). It has achieved that 57% of the graduates are with qualifications in Computer Science, Engineering, Business studies or Science.

5.2.3SloveniaSlovenia has in the last decade improved the educational profile of its population substantially.

This is due to a bigger involvement of the younger generation in the educational system, which was a consequence of a big unemployment rate among the young generation in the nineties (Development report, 2002). The gap between Slovenia and other developed countries in the share of higher-educated young people is slowly getting narrower. However in Slovenia the share of young people (aged 25-34) that attained at least tertiary education is still nearly the half of that in Finland and about 70% of that in Ireland (IMD, 2002).

Slovenia has had free secondary and tertiary education for the whole period after second world war. Secondary education is of good quality and with a relatively low number of students per teacher. More critical is the tertiary education system, where Slovenia especially in terms of internationalisation is lagging a lot.

Slovenian higher educational system has a relatively high level of accessibility, what mostly is a result of no tuition fees at the undergraduate level, student work system, government financed grant system and government subsidies for student meals and lodging. But on the other hand Slovenian educational system meets very poorly the needs of the economy. According to IMD it is on the bottom of the scale. The faculties are poorly interconnected and have very few interactions with the business environment, which results with a lack of multidisciplinarity of the graduated students.

The student work system, which is a way of subsidizing students, has many consequences. With a lower taxation student work is more attractive for employers and thus students can get part time job easily. Student work incomes represent for the average student around one third of all incomes (Cati center, 1999) and thus enables them to afford studying. On one hand the student work system improves accessibility, but on the other hand the studies can last longer and be less effective due to the big amount of time and energy consumed for working. However there is also the positive side that this part time jobs can provide the multidisciplinarity and the connection with the business world that the educational system fails to provide. Part time jobs are also very often very good preliminaries for future employment.

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Opposed to Finland, which has 20 small universities, Slovenia has only two huge universities, The universities are gigantic if compared to the size of the nation. University of Ljubljana, the largest one, has around 55.000 students. The sheer size of the universities could be a reason why the changes in the education system are being implemented so slowly. The ministry of education is trying to implement the credit system and to make important changes towards a more "useful in life" university, but there seems little motivation on the side of the universities to make any change.

Another problem is the low level of students that take postgraduate courses. In 2001 there were 13% of postgraduate students among Finnish students, in Slovenia the respective share was only 6,6 %.

5.2.4Comparison Finland - Ireland – Slovenia

Table 11: Tertiary enrolment by field of study as % of 20-24 age group in 1995.

Natural sciencesMathematics and computer

scienceEngineering

Finland 2,9 3,5 12,7Ireland 5,4 1,2 3,9Slovenia 0,7 0,1 5,6Source: UNESCO, World Development Report, 1998/1999

Table 12: Share of students by field of study.

Slovenia 96/97 (share in %)

EU, 92/93 (share in %)

Field of study All students 1. yearmean (all

stud.)min (all stud.)

max (all stud.)

Humanistic science 8 7 13 9 (Portugal) 20 (Ireland)Social & economic science

38 41 25 16 (Finland) 36 (NL)

Natural science 2 2 6 4(Denmark,NL) 14 (Ireland)Math & computer science

3 3 5 2 (NL) 7 (Finland)

Medicine, hygiene… 6 4 10 4 (Ireland) 18 (Finland)Law 5 5 9 1 (Finland) 19 (Spain)Techniques, architecture

21 21 17 13(Netherlands) 23 (Finland)

Source: UMAR, 2002

In the last decade has in Slovenia risen the share of students studying social sciences, which is a case in all transition countries. In scholar year 1998/1997 the share of students registered at social sciences was 41%. The average of the same share in EU members was 25% and in Finland that had the lowest value of this share it was 16%. Such a distribution of students by field, can be a long term disadvantage for Slovenia. A lack of natural science and computer science experts will be a constraint for growth, since these are the fields where the highest future economic potential lies.

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Table 13: Comparison of main indexes showing the situation of human resources and values in the countries

Category Finland Ireland SloveniaPercent of population that has attained at least tertiary education for persons 25-34 (1999)

38 (3) 29 (14) 19,5 (28)

Total public expenditure on education (% GDP year 2000) 5,9 (19) 6,7 (12) 5,4 (21)Pupil to teacher ratio – secondary school 17,4 (19) 21,6 (31) 12,2 (6)The educational system meets the needs of a competitive economy

8,6 (1) 8,0 (2) 4,7 (29)

University education meets the needs of a competitive economy

8,9 (1) 8,0 (2) 5,0 (34)

knowledge transfer 7,8 (1) 5,65 (11) 3,1 (42)*The rank between 49 countries according to IMD World Competitiveness Yearbook 2002

5.3 LABOUR MARKETFinland’s generous social welfare system could be an obstacle to an efficient labor market.

The generous legislation does not provide for an incentive to look for work. However it doesn't look like Finland’s development was hurt by this, even more Finland's government is strictly committed to preserve its social welfare system, since it believes that only a society where everybody shares the prosperity can be a proper goal for Finland. As a result Finland's income distribution is among the most equal in the West. But on the other side Finland faces a high unemployment rate high unemployment

Ireland can boast with quite a low unemployment rate. This is a result of high economic growth and of the labor legislation system which doesn’t provide large benefits for unemployed. Ireland has gone through a lot of changes: in the eighties and beginning of nineties there was a huge outflow of human capital, especially well educated. Nowadays Ireland is experiencing an opposite phenomenon, in 2001 there were 40.000 new workers coming to Ireland for work.

Liquid and good labor market contributed a lot the Irish development. Labor costs in the computer sector are lower in Ireland than in most other EU countries, suggesting that skilled labor is relatively cheap in Ireland, and that this is a factor in attracting major investment in the high technology sector to Ireland.

One of the strengths of Ireland is that it has a high birth rate and thus one of the youngest populations in Europe with 38% under the age of 25. This combined with a secular increase in women’s labor force participation represents a high development potential and also a comparative advantage to other developed countries, which population is ageing much faster.

The labor legislation in Slovenia is very restrictive. The employed workers are safeguarded and it is quite difficult to fire even bad workers. There have recently been some efforts for changes towards more liberal employment legislation. Moreover the unemployment legislation does not provide good incentives for looking for work. People prefer to get the financial unemployment help and take part on the gray market, which has on the long run negative economical and social effects.

Liberal regulations for employing foreign workers could help solving the iliquidity of the national labor market and the misfit of the educational system and economy. But this is not the case in Slovenia, which is according to immigration laws one of the most restrictive European countries. Even

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though there are not enough qualified engineers on the market (IMD, 2002) and the graduates do not match the needs of the market, the labor legislation still poses major obstacles to employ foreigners.

6 NATIONAL INNOVATION SYSTEMS AND R&D POLICY

Productivity growth in mature economies is determined less by capital accumulation and more by innovation29 originating in private and public institutions and within firms. Therefore, the conditions that make innovation possible are very important, especially when combined with the conditions facilitating the use of Information & Communication technology (ICT) and stimulate R&D.

R&D30 expenditure and financing are at the very centre of a knowledge-based economy because its dynamics and competitiveness depend primarily on the production, distribution and exploitation of knowledge and information.

In this approach, knowledge is a factor of production and its production (investment in knowledge) responds to economic incentives. Knowledge and the capacity to use it effectively (innovation) is a key to the competitiveness of national economies and have enormous impact on employment.

Economic competitiveness is essentially measured by the capacity to produce more with less work, either direct or indirect. For a country, labour productivity is an appropriate indicator for this purpose. Employment is linked to the level of activity and to competitiveness: if an activity is not competitive, its growth is impossible.

Potential economic growth depends directly on investment in new knowledge innovations. These investments increase the technology set and the productive capacity of the traditional factors of production. This implies that new knowledge innovations increase the rates of return of all other types of investments (education, capital goods, etc.). Investment in knowledge and other types of investment is complementary and interactive economic competitiveness is achieved through the capacity to transform knowledge into economic performance, by means of investment in new technologies.

The process of commercialisation and increasing competitiveness is reflected in emerging new activities and new products for the domestic and export markets. This induces restructuring of existing activities both through strong structural change towards high tech and knowledge intensive activities and through the modernization of the old economy by diffusion of new technologies (internet 3).

6.1 FinlandRecent policy direction in Finland is extending the concept of a national innovation system,

which has long been an established cornerstone of science and technology policy. In line with cluster approach this has enhanced intergovernmental co-ordination and national co-operation between 29 Knowledge could be applied in two different ways: either to invent new ideas, products, processes and methods; either to innovate and improve existing ideas, products, processes and methods in small incremental steps (Jaklič, 1999:117).

30 In our paper we use following definition of R&D: Research means a search for new ideas while Development means practical implementation of those ideas.

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different sectors and organizations. Moreover, it has ensured an increase in the resources available for research, although the amount of public sector research and University core funding is still the subject of debate (internet 9).

New organizations associated with technology transfer, diffusion and commercialisation have been created, including nation-wide networks of technology parks and centres of expertise. Some of these have initiated spin-off projects and incubators, in other cases technology transfer companies have been established to commercialise the results generated in universities and research institutes. Alongside these developments, access to venture capital is increasing, and the importance of the role of regional innovation policy is growing.

The recent emergence of the knowledge economy is a key, with its renewed emphasis on adequate levels of education and training as necessary inputs to compete successfully. The research community and enterprises have active networks in Finland. The R&D funding has been strongly focused to national research and technology programs, which have turned out to be productive and functional.

Knowledge-intensive growth is business-driven in Finland. The public sector has supported this development efficiently by measures taken in cooperation with the private sector. The operational environments thus created are important for the success of enterprises' own measures and for all societal and cultural development. Conditions for knowledge-intensive growth, as well as for a knowledge-based society, are created within different policy sectors. Cooperation and networking both between policy sectors and between the sectors and the national innovation system play an important role in this. (internet 16)

How has Finland transformed nice vision into practice? Programs are key instruments to promote the establishment of creative research environments and their development. They are focused to technology areas that are important to Finnish industry and service sector - communications technology, biotechnology, and development of new production processes and to new material technologies. The research institutes, universities and enterprises together with the funding organization plan and carry out the work performed in programs.

The technology programs are coordinated by Tekes, the National Technology Agency; while the Academy of Finland coordinates the research programs and SITRA, The Finnish National Fund for Research and development, as largest public venture capital provider provide funds.

Tekes, is the main organization for technology financing in Finland. Tekes funds and activates challenging product development and research projects. The programs aim to strengthen the technological and scientific skills, which are the basis of the international competitiveness. Tekes currently partly participates in more than 60 programs, worth €1.3 billion annually. (internet 9) To get the clear picture of Tekes’ role, we have to mention that when the amount of Tekes finance is compared relative to Nokia's R&D activities in Finland, then the share of Tekes finance is slightly below two percent over the same time period. In 2001, Nokia' share of the total R&D spending in Finland was close to one third, and approximately 47 percent of the total private sector R&D spending. Moreover, taking into account Nokia' foreign R&D investments, the group™s R&D spending was close to 18 billion FIM (3 billion Euros) in 2001. (internet 24).

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Along with the centre of excellence program, the research programs are the key instruments by which the Academy of Finland promotes the establishment of creative research environments and their development. The aim of the programs is to raise the quality of research in the field, to create a sound knowledge base, to increase the networking of researchers and to intensify research training (Internet 9).

Important strength of Finland is transformation of nice ideas and visions into reality. From the data in Table 18 observer can identify some of the most important reasons why is Finnish R&D so successful and consequently why Finland economy is one of the most competitive in the world.

Table 14: Finland's R&D expenditure by sector in 1991- 2000, estimated expenditure for 2001 and GDP share of R&D expenditure

YearBusiness enterprises Public sector***

University sector****

TotalGDP share

of R&D expenditure**

€ million % € mill. % € mil. % € mill. %1991 975.1 57.0 357.5 20.9 378.0 22.1 1,710.6 2.041993 1,048.5 58.4 379.7 21.1 367.5 20.5 1,795.8 2.171995 1,373.4 63.2 374.4 17.2 424.6 19.6 2,172.4 2.301997 1,916.7 66.0 408.6 14.1 579.5 20.0 2,904.9 2.721998 2,252.8 67.2 443.9 13.2 657.8 19.6 3,354.5 2.891999 2,643.9 68.2 470.1 12.1 764.8 19.7 3,878.8 3.222000 3,135.9 70.9 497.4 11.2 789.3 17.8 4,422.6 3.372001* 3,615.6 72.9 515.3 10.4 829.0 16.7 4,960.0 3.65

* Estimate based on surveys and other calculations ** Preliminary data in 2000, the GDP data for 2001 are based on the Ministry of Finance's forecast. *** Incl. private non-profit sector **** Incl. university central hospitals since 1997 and AMK institutions (polytechnics) from 1999

vir: internet 19

We can notice that in the last decade GDP share of R&D expenditure has increase for 57% from 2,04% to 3,65% of GDP in 10 years (Finland is second nation in the world regarding this criterion). However, Finland is the first nation in the world regarding criterion Total R&D personnel in business per capita in the year 20023. This strong commitment to knowledge-based society was possible because firm social consensus about national priorities.

Another Finland’s strength is very efficient commercialization of new products. But why has been Finland so successful in commercialization? Because of systematic relocation of the funds for R&D from Public sector (20,9% in 1991 to 10,4 in 2001) and University sector (22,1% in 1991 to 16,7% in 2001) to Private sector (57% in 1991 to 72,9% in 2001). And also because of firm commitment to invest substantial amount of GDP in R&D activities. By doing this, buzzwords like technology transfer, diffusion and commercialization become practice in business real life. If we compare Slovenian business expenditure on R&D in the year 1999 with Finnish, we can see that in Slovenia business expenditure represents only 56,9% out of whole R&D investments and that is

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comparable with Finnish situation in the year 1993. However, those two situations are comparable only regarding the distribution of R&D funds, while % points of GDP invested in R&D in those two countries are not comparable. In the year 1999 Slovenia invested historically the highest funds - 1,51% of GDP in R&D activities, while Finland invested already more than 2% in the year 1991, and currently invests more than 3,65% of GDP (see internet 19 and 23).

Not only efficient expenditure of R&D founds counts, but even more the effective investment in selected industries does. In other words being focused was Finnish key to success. The rapidly growing share of the electric and electronic industries now represents over half of all private sector R&D, and is still growing. As research directly or indirectly serving information industry is also conducted in universities and public sector research institutes, it can be estimated that about half of all the national research input is used in or for the benefit of this single branch. In terms of money this amounted to some €1.7 billion in 1998. In higher education the proportion is nearly the same: some 35 per cent of all the university and polytechnic graduates have an education in ICT or neighbouring fields. (internet 16).

Finland is also active and successful in International research cooperation. In the EU Fifth RTD Framework program31 (1998-2002) participated 1,602 Finnish participants in spring 2002. Participation is important for Finland because EU spends about 4% of its annual budget on the implementation of R&D policy, which are available to applicants from member states. (internet 17).

6.2 IrelandThe decision to try to enlist foreign capital in the development of the Irish economy, and the

consequent opening of trade, led to a rapid increase in the average level of technological sophistication in businesses in Ireland. At the same time, a series of research institutions was established (Hardiman in Yearley, leto). But the first attempt to provide a framework for relating these developments to each other was introduced under the international tutelage of the Organization for Economic Cooperation and Development (OECD).

The OECD sponsored several influential policy papers in the 1960s and 70s including a major stimulus to educational reform, Investment in Education (Brown in Yearley). In the early 1960s OECD produced a report, Science and Irish Economic Development, which, as its title implies, stressed the need to cultivate science and technology for national development. To this end, the report recommended the establishment of a National Science Council or NSC (OECD 1966). The Irish government duly obliged and the council was created with a duty "to advise the Government on appropriate national policies for research, development and technology" (Murphy in Yearley).

In 1983 National Board for Science and Technology (NBST) published progress report in which authors drew on models offered by Scandinavian science policy analysts who described systematic problems besetting small European countries' science and technology systems: they were "squeezed" between, on the one hand, the research networks of the large states that were oriented to

31 The budget of the Fifth Framework Program (1998-2002) is € 14,960 million. The Commission submitted its proposal for the Sixth Framework Program (2002-2006) and the intention is that the decision on it will make during 2002. The budget of the Sixth Framework Program is € 17,500 million (internet 17).

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those states' own "sophisticated industrial systems" and, on the other hand, the newly industrializing countries that were rapidly moving into established industrial sectors (NBST in Yearley, leto).

Yearley (leto)concludes his study that the political economy of science in the Irish Republic has been strongly affected by international influences, including the behaviour of foreign transnationals, international agencies such as the OECD, international bankers, and the EC bureaucracy. (Internet 19)

Major change in Irish national innovation and R&D system happened in 1990’s, when during the 1970’ and 1980’ imported knowledge spilt over and the need for change and more active policy occurred.

The first sign of change was introduced by The White Paper on Science Technology and Innovation (1996) that set out the vision of the Irish economy and the role of STI:

" Science Technology and Innovation policy must therefore work to create an economy characterized by sustainable high employment, high living standards, competition and innovation in an enterprise sector:

featuring growing use of skilled and qualified staff and rising systematic expenditure on R&D; engaged in trading products and services using processes and technologies all of which

continuously improve to meet the highest international competition; generating and enhancing, as well as absorbing, new technology and new techniques; placing particular emphasis on raising the competence of indigenous companies.”

Recent years have witnessed a radical change in Irish public policy towards Science, Technology and Innovation (STI), which is now regarded as central to country’s continued economic and social development. The key role of STI policy is signalled in the National Development Plan 2000 - 2006, and reflected in the initiatives of the HEA, Science Foundation Ireland, Forfás, Enterprise Ireland, and the full range of State agencies supporting the evolution of Ireland as a ‘knowledge-based society ’. (internet 21)

Priorities of National Development Plan 2000-06 are focused on measures in three main areas – academic institutions, businesses and the research infrastructure.

Measures for academic institutions concentrate on developing world class research in third level institutions, encouraging spin-off companies and supporting Ireland’s advanced technology capabilities (particularly in biotechnology and ICT). For enterprises, the aim is to encourage more companies to become research performers and to move up ‘the innovation staircase’ – i.e. to improve their research capabilities. (internet20)

Encouraging venture capital is also a key, as is strengthening national and international collaboration. In terms of infrastructure, improving equipment and facilities, encouraging regional innovation systems, Technology Foresight and continuing to raise public awareness and understanding of science are also very important.

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6.3 SloveniaAccording to the Slovenian economy and development strategy (SGRS II, 2001-2006) top

priorities in creating innovative and knowledge-based society are (int 23): Increase investments in Innovation and R&D with special emphasize on improving skills and

technical abilities to capitalize on opportunities offered by new technologies Privatise and deregulate key infrastructure sectors (telecommunications, energy, utilities) Upgrade the innovation and technological capabilities

However, major constraint of Slovenian Innovation and R&D situation and key issue that should be focused on at the moment is not the amount of invested money, but rather lack of cooperation between universities, research institutions and business enterprise, and insufficient transfer of knowledge among different actors in the society. According to latest report about Slovenian R&D situation, Slovenia is lagging behind the EU average (and of course behind Finland and Ireland) especially in the capability to transfer the knowledge, in improvement of technological skills, and introduction of financial mechanism, which would speed up knowledge transfer. (see internet 24).

We should expose another relevant question regarding the focus and vision of Slovenian Innovation and R&D reality and also building the critical mass of enough scientists and researchers working on specific field to make innovation breakthrough possible. Slovenia is lagging behind European average in the level of new product introduction, technological innovation and on very important economic field of promoting ownership consolidation and entrepreneurship. Projections of Slovenia’s development and growth potential indicate that without radical increase of invested funds in R&D and ICT Slovenia will suffer substantially on the long run. Newly adopted National R&D program contains practical inter-ministry measures for improving current situations, but some authors already warning that social component is emphasized on expense of R&D. (see internet 24)

6.4 Comparison Table 19 presents the current strengths, weaknesses and major observed trends of Finland,

Ireland, and Slovenia on analytical level and in condensed form. Additional précised information are available in table 20, which gives us more detailed figures.

Table 15: Strengths and Weaknesses analysis of Innovation and R&D in Finland, Ireland and Slovenia

MAJOR STRENGTHS relative to other EU Member

states

MAJOR WEAKNESSES relative to other EU

Member States

Major Observed Trends between mid 1990s and most recently

available dataFinland* Population with tertiary

degree; public and business investment in R&D, high-tech patenting; Internet penetration.

Relatively small No. of Innovative SMEs.

Leading ahead on many indicators particularly tertiary education share, business R&D investment, USPTO patenting, high-tech manufacturing value added.

Ireland** Supply of S&E graduates; Innovative SMEs; High-tech services

Public R&D Expenditure; High-tech patenting; Life-long learning

Increased high-tech service employment, EPO patenting, high-tech manufacturing value-added,

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declining public R&D expenditure.Slovenia adoption of EU directives

concerning innovation and R&D area

Lack of R&D focus; too much stress on basic research; insufficient transfer of knowledge; lack of cooperation; not enough S&E graduates

moderate increase of R&D expenditures, however not sufficient on the long run;

VIR: *internet 1 in **Internet 2

Table 16: Selected criterions for presentation of Counties’ Scientific development

CRITERION EXPLANATION FINLAND IRELAND SLOVENIARank (Value) Rank (Value) Rank (Value)

Total expenditure on R&D US$ million, 2000 18 (4.013) 29 (1.109) 43 (274)Total expenditure on R&D US$ per capita, 2000 5 (774,7) 18 (302,2) 24 (137,9)Total expenditure on R&D % of GDP, 2000 2 (3,319) 20 (1,608) 22 (1,514)Business expenditure on R&D US$ million, 2000 15 (2.854) 24 (811) 42 (126)Business expenditure on R&D US$ per capita, 2000 5 (550,88) 18 (220,87) 24 (63,2)Total R&D personnel nationwide full time equivalent, x1000, 2000 18 (50,6) 37 (12) 39 (8,5)Total R&D personnel nationwide per capita

full time equivalent per 1000 people, 2000

1 (9,788) 17 (4,27) 20 (3,28)

Total R&D personnel in business enterprise

full time equivalent, x1000, 2000 17 (27,8) 29 (8,2) 36 (4,1)

Total R&D personnel in business per capita

full time equivalent, x1000, 2000 1 (5,381) 18 (2,228) 19 (2,06)

Basic research* Attitude toward long term economic development

3 (8,03) 17 (6,28) 37 (3,92)

* Data was gathered with survey among top representatives. Source: WCY 2002

More realistic picture of financial funds invested in R&D we can get if we take into account transfer of knowledge and spill over effect. On average 25% of innovative EU firms co-operate with other firms, universities or public research centres. This phenomenon is strongest in Finland where more than 50% of firms are involved in such co-operation (5 THE NATURE OF INNOVATION.pdf) what could give as an answer why is Finland the most successful R&D European country. Such cooperation can help to accelerate the generation of new ideas and their diffusion. Innovation cooperation can have important effects on S&T productivity in firms, through sharing (and thus reducing) the costs of R&D, while at the same time improving the quality of new products and shortening product life cycles. And on the other hand, this argument explains why is Slovenia lagging substantially behind Finland, even though some Slovenian selected criterion don’t lag so radically.

7 FINANCIAL ENVIRONMENT

A well-functioning financial system mobilizes resources and savings and ensures efficient allocation and use of resources. These functions help increase productivity, which is key to growth and poverty alleviation (World bank, 2002). Within the business system approach, the financial system represents one of the direct social institutions that directly shapes the economic system and makes up the business environment at any given moment. Economic development can be ensured through financial means that derive from the capital market, or through the help of banks through a credit

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system (Jaklič, 2002). Based on these two main distinctions Whitley (1999) divides and describes financial systems as:

Capital market based financial system where capital is mobilized and distributed largely through large and liquid markets which trade and price financial claims through the usual commodity-market processes. In this kind of system, secondary and tertiary markets are well developed and shares can easily be traded, so most of the investors have little interest in destiny of the firm they own shares in, which calls for strong corporate control on these markets.

In credit-based financial system banks are the dominant institutions. They are either universal banks or a combination of commercial banks and long-term credit banks coordinated by state agencies and ministries. The power of the state is greater in this system, since it is able to influence company decisions through the allocation of financial means. Capital markets are on the other hand weak and fairly liquid and play minor role in mobilizing and pricing investment funds. The British financial system would be good example for capital market based financial system, while are France and Germany representing the second one.

In the following paragraphs we are presenting main characteristics and the underlying dynamics of financial systems in Finland, Ireland and in Slovenia. At the end we benchmark competitiveness of all three systems.

7.1 FinlandFinland has stable and healthy financial system and according to IMD ranks fourth behind US,

Netherlands, and Luxembourg according to factor finance. It holds the first place among 49 countries in the availability of bank credits to companies (US are second, and Australia third), in the development of banking services, (Switzerland is placed second and US are third), and they hold second place behind US in the availability of venture capital to business development. This situation has emerged as consequence of turbulent happenings during 1980s and 1990.

Over the period from 1980 to 2000, the traditional set-up underwent a significant reform. The reform consisted of the liberalization of financial markets in the 1980, the banking crisis in the early 1990s and, finally, the growth of foreign ownership and the stock market in the late 1990s. As a result, the role of financial institutions as the creditors and owners of the non-financial corporations has decreased (Ali-Yrkkö et al., 2001).

Until the 1980 Finland had classical credit-based system with universal banks and state as a dominant player. The characteristics of this period are bank groups were banks collaborate with companies and each banking group was tied to the others through cross-ownership and interlocking directorates. Bank of Finland executed policy that enabled banks relatively high and stable profit margins, so banking in Finland was steady and safe. In the beginning of the 1980s short-term inter-firm money markets appeared and Bank of Finland responded by starting to remove some of the protective regulations in the official financial markets.32 In this period the first foreign banks were allowed to begin operations in Finland, and few years later also Finnish bank were allowed to establish foreign subsidiaries and operate in international credit markets. In the mid-1980s, deregulation of the Finnish financial sector

32The biggest corporations created the so-called “grey markets” and became “industrial bankers”, who began lending their excess cash directly to each other at daily rates. For more see Tainio and Lilja, 2002.

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started to escalate and consequently new financial instruments were introduced and new financial institutions entered the scene. Beside banks and insurance companies, a new breed of credit and finance organizations emerged: investment banks, venture capital firms, hedge funds, securities firms, and mutual funds (Tainio, Lilja, 2002).

This deregulation and postwar history “that debt pays off”33 had caused and increasing supply and at the same time demand for credits, that facilitated the boom in investments, overheated the economy, and pushed Finland in deep economic crisis and a lengthy recession in the early 1990s. This crisis has coincided with collapse of the Soviet Union that accounted for about 25% of Finnish exports.

As a result of this crisis a major transformation of Finnish financial system happened: major banks were restructured (two leading banks were merged into Merita-bank, the Finnish root for the pan - Nordic bank, Nordea), new foreign financial conglomerates entered the market, but probably the most significant was the liberalization of foreign ownership in the beginning of 1993. The formation of Nordea has genuinely internationalised the Finnish financial sector. Together with the wide-scale involvement of international financial institutions in Finnish financial markets and in the Helsinki Stock Exchange, Nordea has pushed the Finnish financial system away from the credit-based system. This process was accelerated by the fact that large Finnish companies have located their financial units and parts of the investor relation operations abroad, and turned in their financing to the international stock and bond markets (Tainio, Lilja, 2002).

Securities regulation was crucial for development of Finnish financial markets in 1990s. By then, the transparency of the market was poor, reflecting the lack of incentives to provide accurate information. The introduction of the Securities Market Act in 1989 and the restructuring of the Finnish financial markets supervision in 1993, have significantly improved the transparency and integrity of the Finnish financial markets over the past two decades (Ali-Yrkkö et al., 2001). The level of protection provided by the Finnish legislation for shareholders has also increased while the protection of creditors has decreased.

These reforms led to sound financial system with the banking system and the insurance and the pension industries well capitalized. Profitability of banking system is high and loan losses very low (IMF, 2002). The Finnish banking system is dominated by three major groups of deposit banks: MeritaNordbanken (Nordea), the result of the merger between Merita and Swedish Nordbanken, as well as Okobank) and the 100% government-owned Leonia (former Postipankki). There are two big commercial banks with national branch networks and five smaller ones.

The stock market infrastructure has too changed. Besides technological advance, an important trend has been the increase in the market share of smaller independent investment banks and foreign investment banks in the broking of stocks. One of the latest trends is the increase of remote brokers in the Finnish stock market. Together with increased foreign ownership, the changes have increased (the need for) market transparency and liquidity.

Tainio and Lilja (2002) sum up that, the Finnish financial system has moved toward the capital market-based system. The sector has been deregulated and linked to the global capital markets. This change in the Finnish financial system has been an essential part in the evolution of the entire Finnish 33 High inflation and the tax system eased the pay-back burden (Tainio, Lilja, 2002).

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business system. Banks, treasuries, and the investor-relation functions of companies have been major agents driving the change process.

7.2 Ireland According to IMDs competitiveness indicator finance is Ireland ranked in the upper third

(place 14) among 49 countries. They are placed the highest (fifth place) according to availability of venture capital for business development, and they rank the lowest (24th) in the development of banking services (Finland is first, and Slovenia 47th).

The defining moment for the financial services sector, and in particular the development of its money and capital markets, came in 1978-1978, when the Irish government introduced capital controls and entered the European Monetary System. With this step they terminated the 150-year-old monetary union with UK. Expansion of the system that followed in next two decades, was accelerated by the abolition of the long standing Irish banks’ interest rate cartel, financial deregulation, in line with the rest of Europe; and the growth of the Dublin foreign exchange market (Hutchinson, 1999).

In 1978 the Irish government established the International Financial Services Center (IFSC) in attempt to broaden the financial services industry in Ireland.34 Institutions qualifying for IFCS status were offered 10% corporate tax rate, and a key criterion was that activities were carried out with non-residents and in non-Irish currencies.35 Ireland has developed a breadth and depth to this sector, and in terms of its range of financial services, Dublin can be placed ahead of Edinburgh that, outside of London, Has been traditionally viewed as the most important financial service in the British Isles (Hutchinson, 2000).

The Irish stock exchange (ISE) has operated independently since 1995, having previously been integrated into the International Stock Exchange of the United Kingdom and the Republic of Ireland. It provides a market for the purchase and sale of negotiable securities, mostly Irish equities and government bonds. Major difficulties of ISE are liquidity problems and over-reliance on the performance of a small number of major stocks that dominate the market’s trading and capitalization.

Despite signs of increasing competition, the Irish banking sector remains more concentrated than most of its EU counterparts. The combined market share of the top five banks in Ireland is 82%, compared with an EU average of 63%, while the top two banks (AIB and Bank of Ireland) alone account for 60% of the market. However, technological development, the deepening integration of the European banking sector, as well as domestic privatizations, have begun to impact on the structure of the Irish banking sector (EIU Country Profile, 2001).

Ireland has an advanced banking and financial system that is generally competitive. The government plays a small role in the banking sector but is expected to privatise its holdings in the Industrial Credit Corporation and the Agricultural Credit Corporation in the near future. It has also established the Irish Financial Services Regulatory Authority specifically to supervise financial services and it is expected that this new agency will improve the efficiency of the sector (Index of Economic Freedom, 2002).

34 The main activities of IFSC institutions include international banking, corporate treasury, insurance and reinsurance, fund management, asset financing, custody and administration services, and bank operations.35 Irish government has under pressure from the European commisson agreed to phase out IFSC corporate tax incentives. Since the end of 1999 new institutions at the IFSC have not been eligible for the 10% rate; they have paid the standard corporate tax rate, though this is beign reduced in stages so that by 2003 the trading profits of all companies in Ireland will be taxed at 12.5%. however, institutions who were already paying the special 10% rate will continue to do so until 2005.

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7.3 Slovenia

According to factor finance is in this year’s IMD’s competitiveness yearbook Slovenia ranked in 38th place. It is surrounded with transition countries like Slovakia (37th), Russia (40th), and Czech Republic (41st), and it lags behind Finland and Ireland.

Slovenian financial system has similar as Finnish undergone several changes in 1990, after Slovenia became independent, however it looks like that the major changes are still to come. The country’s financial sector is still far away from being internationally competitive either in terms of its soundness, efficiency and costs, or in terms of its product variety (Mrak, Rojec, Potočnik, 2002). Restructuring is not finished yet and system faces with numerous problems that can also be observed from rankings in IMD’s competitiveness yearbook. Slovenia ranks according to all criteria that measure the competitiveness of finance system in the second (lowest) part of countries. The same source also stresses that Slovenia’s challenge in 2002 is to consolidate and privatise banks and insurance companies.

In period from 1992 – 1997 state rehabilitated two major banks that were faced with losses as a result of political interference in their operations.36 Rehabilitation was planed as a first phase of privatization of two state-owned banks. Currently the second phase of privatization is under way, which will involve strategic (and possibly foreign) investors. Some banks have merged recently, and new mergers have been announced. Banks in Slovenia with a major foreign ownership are Bank Austria & Creditanstalt, Volksbank, and Bank Societe Generale. The largest banks in Slovenia are: Nova Ljubljanska Banka, SKB Banka, Nova Kreditna Banka Maribor, Banka Koper, and Banka Celje. Beginning of the 1990s was also important because stock market appeared, beside that privatisation of state owned companies began in that time, and consequently new financial institutions and instruments emerged.

Nevertheless the reforms of Slovene financial system are not over yet, so SEDS (The Strategy of Economic Development of Slovenia) divides measures for further restructuring in: (i) increased competition among financial service providers and continued restructuring of financial service providers; (ii) an improvement of regulation and control (iii) harmonization of Slovene legislation with EU regulations. Another publication of Slovene government argues (IMAR, Development report 2002) that the greatest challenge for banking and insurance sectors still lies in low competition, and in unfinished privatization process. The ending of privatization and liberalization of financial markets will also reinforce the importance of capital market.

Jaklič (2002) argues that the greatest problems of Slovenian financial system are:Conservatism in the banking system - banks are averse to funding risky investments, especially

if those bearing these are small and medium-sized enterprises. To a large measure this is also a continuation of the mentality characterized by a lack of deepened relations between banks and enterprises.

Non-competitiveness of the banking sector - We recognize a high active nominal interest rate in Slovenia, which is the result of relatively high inflation and real markup. The

36 Previous history of Slovene financial system is presented in Jaklič, 1999.

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competitiveness of the banking sector is most often evaluated by taking into account interest spread.37 The more competitive and efficient banking in a country is, the smaller the interest spread that can be granted. In Slovenia in 2000 the interest spread amounted to 5.7, which in comparison with other countries ranks us in 43rd place (Schwab, Porter, Sachs, 2002).

Inefficient capital market - Capital market is not carrying out its basic function of the primary issue of securities and therefore it has not been possible to acquire fresh financial capital through it. Major problem of Slovene capital market are: small size, lack of liquidity, lack of transparency, and disinclination of economic agents toward this kind of funding.

Lack of transparency and inefficiency – State inefficiently and indistinctively performs its policy in stimulating the founding and expansion of SMEs.

How can Slovenia deal with these problems? And what lessons can be learned from Finland and Ireland? We will try to give some of the answers in the following sections of this paper. However, we firstly present comparison of financial competitiveness all three countries.

7.4 Comparison For comparison of financial systems among three countries we will use the IMD’s criteria and

the Index of Economic Freedom.

Table 17: Comparison of IMD’s financial criteria for Finland, Ireland and Slovenia in 2002.

Criteria

Finland Ireland Slovenia

Rank* (Score)** Rank (Score) Rank (Score)

Finance (Overall factor rankings) 4 14 38

Ban

k ef

ficie

ncy

Credit – flows easily from banks to businesses

1 (8.65) 10 (7.43) 28 (6.18)

Venture capital – is easily available for business development

2 (7.71) 5 (6.67) 34 (3.66)

Banking services – are widely developed in your country

1 (9.56) 24 (8.07) 47 (5.02)

Banking regulation – does not hinder competitiveness in your country

1 (9.22) 14 (7.93) 42 (5.08)

Stock markets – provide adequate financing to companies

4 (7.97) 22 (6.04) 43 (3.52)

37 Source: WEF Geneve, IER, EF Ljubljana

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Stoc

k M

arke

t Eff

icie

ncy Rights and responsibilities of

shareholders – are well defined 1 (8.65) 12 (7.54) 39 (5.43)

Financial institutions transparency – is widely developed in your country

1(8.34) 20 (6.77) 35 (5.06)

Insider trading – is not common in the stock market 2 (7.95) 7 (7.12) 40 (4.46)

Source: IMD, 2002.*Presents placement among 49 that were examined.** On the scale from 1 to 10.

On a first glance we can see that Finland ranks among the best countries under all criteria. They have managed to transform their financial system into the most competitive one, and they score high in bank and stock market efficiency. Ireland scores a bit higher in the bank efficiency, however also theirs stock market efficiency is among first half of all countries. Slovenia lags behind both countries and ranks at the bottom in bank and also in stock market efficiency. According to abovementioned data Slovenian financial system does not support the overall competitiveness of country. Insufficient long-term sources of disposable funding (especially for some riskier funding) represent a significant obstacle in the path of Slovenian development, as do inefficient funding and capital markets, which poorly carry out their basic mission in the national economy Jaklič (2002). What can Slovenia do to improve its financial profile? Our proposals are presented at the end of this paper.

Wall Street Journal ranks countries in according to Index of Economic Freedom where sub-factors composing this index are trade policy; government intervention; foreign investment; wages and prices; regulation; fiscal burden; monetary policy; banking and finance; property rights; and black market. Countries are according to banking and finance factor arranged on a scale from very low, low, moderate, high and very high restrictions on banks.38 Scores for all three countries are presented in the table below.

Table 18: Comparison of Banking and Finance sub-factor for three countries in year 2002Country Score – Compared with previous year Level of

Restrictions on BanksFinland 2 - Better Low level of restrictionsIreland 1 - Stable Very low level of restrictionsSlovenia 3 - Stable Moderate level of restrictions

Source: Wall Street Journal, 2002.

As we can se from this table is Ireland according to level of banking restrictions ahead of Finland and Slovenia.

38 Variables of banking anf finance factor are government ownership of banks; restrictions on the ability of foreign banks to open branches and subsidiaries; government influence over the allocation of credit; government regulations; freedom to offer all types of financial services, securities, and insurance policies.

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8 (ICT) INFRASTRUCTURE

Today, infrastructure cannot be considered in the traditional terms of roads, trains, harbour facilities, and even airports. During the past two decades, the technological revolution – computers, telecommunications and Internet – has had a profound impact on economic success of the nations and welfare of their citizens.

Information and communication technology (ICT) is a core element of the knowledge society and an important complement to R&D activities. ICT can be seen both as innovation per se and, due to its general– purpose character, a vehicle for further innovations in various other sectors and fields. Unlike traditional types of capital investment, ICT represents general–purpose technology whose contribution to productivity and economic growth is greater than the direct effect of ICT producing sectors. ICT is also a central element in the innovation success of modern economies. (nternet4 p7)

ICT is becoming the key asset for the future competitiveness of the nation. Therefore, the priority of nations is to invest heavy in this sector, develop the people who will operate the new technological infrastructure and strive to be on the leading edge of future developments.

8.1 FinlandIn the last decade Finland got image of high-tech county and became a symbol for other European

countries not only because of quick introduction of ICT and advanced usage of ICT but above all because Finland become world class cutting-edge solution provider.

Today “Finland has a world class technology in: 1) electronics and telecommunication, 2) forest industries, 3) production and process machinery, 4) process industries, and 5) off-shore industries. The electronics and electrical industry has become the third strong supporting beam for the Finnish national economy alongside the forest and the metal and engineering industries. High-tech exports have increased their share of Finland’s total exports. The Finnish high-tech exports totalled €9.9 billion in 2001, being 21 per cent of total exports. The share of high-tech products within total exports is now four times larger than ten years ago” (internet 14).

Among other reasons why Finland succeeded in ICT breakthrough from moderate user of technologies at the beginning of 1990’ to world leader and cutting-edge solutions provider at the beginning of 2000’ we should mention those: Large, uncrossable county, where inhabitants generally live in small number of big cities, while

others live far away from cultural and economic gravity centres, and relatively undeveloped system of fixed telephone lines on the other hand, were probably natural stimuli and underlying, hidden reasons for focusing into mobile telecommunication industry. We could speculate that Finns were forced by nature to invest and developed applicable mobile telecommunication products.

Shock because of loss of Soviet market and general recession forced Finnish companies to think through the situation and formulate the vision as an answer to those challenges. If they wanted to be strategically independent they had to bet on new technologies as the only exit from existing situation and stay focused on some ICT niche markets. As we have already mentioned in the case

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of Nokia, which all around the world become model for clear business strategy, excellent leadership and inexorable commitment to ICT.

In Finland the state and economy subjects quickly become aware that with ICT usage they clearly benefit from improvements in the organization of production and distribution, from better inventory management and from cost reductions. Firms can thus respond more effectively to changes in the demand of their products (learning and spill over effect).

The use of ICT could also make possible an improvement in competitive conditions, thus increasing efficiency and reducing prices.

Finally, the emergence of new industries and sectors has been only possible because of the intensive use of ICT.

8.2 IrelandIreland for most of this century has been an agricultural economy seeking competitive

advantage on the basis of factor costs. In more recent decades, and particularly with the inflow of European Structural Funds, there has been considerable investment in infrastructure, often associated with the attraction of foreign mobile investment into the country.

Specificity of Ireland’s ICT infrastructure development lies similarly as development of Irish National Innovation and R&D system in strong influence and support from abroad, especially form EU and MNC. The consequences of foreign influences and directions result in less developed Irish own growth initiative and self-sufficiency regarding strategic independence.

8.3 SloveniaThe crucial challenge for Slovenia is to achieve such conditions where both strong

productivity and employment growth contribute to growth in national incomes and to ensure that this is sustainable over the medium term.

With ICT now not playing a crucial role in the modernization of Slovenian economy and in fostering innovation, it is essential to create conditions so that its development, commercialisation and diffusion will be possible.

In particular, barriers to firm creation remain, industry/science relations in Slovenia do not stimulate enough innovation, skilled labour shortages become acute at crucial stages of technological modernization and the transition from the conception of an innovation to its commercial exploitation is often very difficult.

These obstacles should be of particular concern Slovenia where productivity and employment growth has been notably weak in recent years. Clearly, much can be learned from the experience of the Finland and Ireland that have performed admirably well through the 1990s.

The low share in technology–driven industries in the Slovenia is symptomatic of some potentially serious problems. It is not simply that these industries invariably lead in innovation and industrial efficiency but also that, by having a larger presence in value added, they contribute correspondingly more to aggregate productivity and real incomes growth in an economy. Furthermore,

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as vehicles for applied new technologies, these industries contribute to the wider diffusion of new technologies and to technological modernization.

We can conclude this assessment of Slovenian ICT challenges with thought that vision is urgently needed and that something radical should be done in order to restore and/or sustain county’s strategic independence. However, the aim of this paper is not to give magic formula for solving all Slovenian problems, but rather to act as a mirror of current situation, especially because sometimes it is seen that we don’t know where we would like to be and how we would get there. It seems that instead of building on strategic long-term benefits we are focused on solving short-term urgencies.

Major constraint that prevents Slovenia to invest more substantially in R&D and to enter the club of countries in the third development stage is heavy financial commitment and burdening of national budget with investment in infrastructure from the second developmental level. We are talking about national project of building the highway infrastructure. According to latest report about Slovenian R&D situation, major negative structural change occurred because of radical increase of road transport traffic, which among other consequences also exhausts funds that would potentially be available for entering of Slovenia into third development stage. Negative impact of increased road traffic also influenced some indexes that indicate the quality of living in Slovenia. (see int 24).

8.4 ComparisonGenerally speaking, Finland and Ireland are much above EU average (and of course above

Slovenian, too) regarding the development of ICT infrastructure, so we can conclude that their enterprises will be more competitive because they can achieve sustainable growth in labour and total factor productivity.

Advance use of ICT permits Finland and Ireland to beat the costs per unit of output, and the non–cost characteristics of Slovenian firms. This is important both on the domestic and on the international level. High productivity growth may make it possible to finance a firm’s expansion plans. But it also offers the possibility to a firm to sustain real wage increases. Similarly, the standard of living of a country rises when it achieves sustained productivity growth (vir 4)..

Relevant criterion for comparison the development of the county is export of High-tech products. Exports of such goods, often sold on highly specialized niche markets, are therefore especially important for small countries with limited domestic demand, like in cases of Finland, Ireland, and Slovenia. However, some of a country’s high-tech exports may relate to sales by affiliates of foreign companies, which can be significant in certain product markets that are dominated by multinational firms, like in case of Ireland. An important distinction needs to be made between high-tech products and high-tech industries. While most high-tech products are produced by high-tech industries, some are manufactured by medium- or even low-tech industries.

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Table 19: Selected criterions for presentation of Counties’ Technological development

CRITERION EXPLANATION FINLAND IRELAND SLOVENIARank (Value) Rank (Value) Rank (Value)

Investment in telecommunications % of GDP 31 (0,46) 14 (0,681) 10 (0,808)Mobile telephone subscribers No. of subscribers per

1000 inhabitants6 (831,6) 12 (753,5) 29 (477)

New information technology* 1 (9,3) 36 (6,49) 43 (6,06)Computers per capita No. of computers per

1000 people3 (614) 14 (461) 26 (284)

Internet users per 1000 people 7 (512,52) 24 (289,47) 28 (203,05) Information technology skills* 2 (8,88) 10 (7,93) 47 (4,98)Technological cooperation* 1 (8,67) 12 (7,33) 42 (5,43)Development and application of technology*

1 (8,67) 10 (7,73) 41 (5,43)

Funding for technological development*

1 (8,5) 10 (6,68) 41 (3,2)

High-tech exports US$ millions, 2000 19 (10.532) 12 (31.278) 41 (368)High-tech exports % of manufactured

export, 200011 (27,21) 3 (47,75) 38 (4,35)

* Data was gathered with survey among top representatives; source: WCY 2002

The most concerning gap between Slovenia and EU average (especially between Slovenia and Finland & Ireland) occurred in the last years regarding Internet usage. This is even more concerning if we know that Slovenia was among the top 5 Internet users at its beginning in the middle of 1990’s. From this indicator of inclination toward new technologies we could speculate that Slovenians are technology seekers, however they can’t survive fighting impossible market conditions in this field. Some analysts argues that the biggest burden of responsibility is on governmental side, which has focused on activities of second development phase only, while it haven’t do enough to foster and to promote direction toward cutting-edge orientation of the third developmental phase.

8.5 Software clusters

According to the latest survey “Finnish Software Business Cluster” about the situation in Finish software industry, conducted by the Institute of Strategy and International Business at the Helsinki University of Technology, revenues of Finnish software industry in 2001 totaled €900 million, up from €780 million the previous year. Exports increased by about 20 per cent from the previous year to €400 million, despite the fact that the companies own expectations concerning internationalization were not fully met. (internet 15).

“The companies still held that their most important areas of development are product development and commercialization. European software still has a lower degree of commercialization than U.S. software. In fact, commercialization is the biggest challenge faced by Finnish software companies”, argues the report. (internet 13)

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The industry spans 900 companies in Finland employing some 10,000 software professionals. Last year the number of companies was estimated at 700. (internet 13) Finnish software companies tend to be situated in growth centres near universities and technology centres. Growth centres have attracted 75 per cent of software product companies. More than half of all software product companies and 76 per cent of the largest companies in the sector are located in Uusimaa. (internet 15).

In a study A Profile of the Irish Software Industry, 2002, Crone presents the development and the current situation of Irish SW industry: “Ireland has emerged over the last twenty years as a hotbed of software development activity. Most of the world’s leading software companies has operations here. In total, there are more than 800 international and indigenous software companies located in Ireland, employing over 25,000 people and generating a combined turnover of over IR£6bn. Of these overall figures, the indigenous sector employs more than 11,000 people and generates revenues of IR£1bn. In total, the software sector in Ireland is responsible for nearly 8% of Ireland’s GDP and nearly 10% of its exports.” (HotOrigin Ltd in Crone).

To put the current size of the sector into a historical context, it is worth noting that at the start of the 1990s the embryonic Irish software industry employed just under 8.000 people. In fact employment in the Irish software industry increased at an annualised rate of around 15% during the 1990s. This growth performance is very impressive when compared with an overall 6% annualised growth in total employment in the widely acclaimed ‘Celtic Tiger’ economy during the 1990s. Indeed, software employment grew faster than employment in any manufacturing sector during the 1990s. (internet 20)

Strategic difference of Finland and Ireland can be seen in development of SW cluster, too. In Ireland, growth in the high-tech sector is largely due to a policy of encouraging inward investment, particularly from the US. As a result, the high-tech sector in the Ireland is today dominated by externally owned, large-scale production facilities all around the country, while the Finish sector is characterized by relatively small plants combining significant R&D facilities with small to medium-scale production activities, concentrated in Uusimaa. In Ireland indigenous software companies employ 44% industry’s employees and generate 17% of industry’s revenues.

The ownership and market orientation of the high-tech sector in Ireland is broadly similar to that in the Finland. Different development paths of the high-tech sector in Ireland and Finland are interesting even more because countries similarities: both are relatively 'late developers' in industrial terms, both are small, relatively high-cost and very open economies, and both face difficulties because of peripherally relative to the 'core' markets of continental Europe.

These contrasts in the very different development paths of the high-tech sector in Ireland and Finland are all the more interesting because both areas are relatively 'late developers' in industrial terms; both are small, relatively high-cost and very open economies; and, both face the difficulties associated with peripherally relative to the 'core' markets of continental Europe.

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9 KEY SUCCESS FACTORS OF IRELAND AND FINLAND

In previous sections we have tried to provide detailed explanation of various factors that have contributed to high competitiveness of Ireland and Finland. Their success was result of many different factors, like background institutions and values of society, appropriate government actions and winning business strategies of home based and foreign enterprises. The picture of those two economies that was presented in this paper is by no means perfect or complete. Even among scholars and practitioners in Ireland and Finland there is yet no complete agreement about the importance or relevance of different factors for competitiveness of these two nations. However, lessons can still be learned from their experiences.

In this section we will emphasize some most important features or key success factors that have contributed to growth and prosperity of Ireland and Finland. We have divided them into two groups. Common factors are present and important in both nations. Specific factors have contributed to competitiveness of only one country and were not so important for other country.

Picture 4: Key success factors of Ireland and Finland

9.1 Common factors

9.1.1Being focusedThere are many possible strategies for increasing nation’s competitiveness and prosperity.

Finland has chosen innovation as the engine of the growth. It has devoted majority of its resources in terms of financial, social and human capital towards increasing innovative capacity of the country. It has invested in education, fostered collaboration among various institutions and formed different partnership. It has reduced bureaucracy and allowed for swift and unrestrained transfer of knowledge.

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Finland Ireland

Being focusedConsider

specifities of the environment

Social consensusConsistency of

policyStrong education

systemCreation of favorable business

environment

Bottom u approach

Growth through internal forces (innovation)

Positive networking

Commercialization of innovation

Vision

Top down approach

Growth through FDI

Developing linkages

EU subventions

Common factors Specific factorsSpecific factors


However it did not invest into R&D indiscriminately. Government, as well as individual businesses have focused on few most promising sectors (clusters), like telecommunications and pulp processing, where they already had some sore of competitive advantage. As we have stated in the chapter about national innovation system, more than half of all R&D funds and human efforts went into single sector – ICT!

On the other hand Ireland has chosen to grow through FDI. The government has done everything that was in its power to attract foreign multinationals. For decades it invested majority of funds and efforts into making Ireland attractive base for those companies. It has reduced corporate tax rate and improved infrastructure. It has granted other tax concessions and even gave land for free to some corporations. It has reduced bureaucracy and simplified many procedures for establishing and operating a company. Although indigenous industry was seriously undeveloped government did not help it, because it expected that it will eventually develop because of spill over effect. Only recently, after almost four decades of attracting FDI, when it was firmly established as a favourable location for servicing the EU market, did Ireland change it’s direction and started to promote indigenous industry.

The lesson from Ireland and Finland is clear: you cannot be anything to everybody. You have to decide on your priorities and stick to them. Having priorities necessary implies that some trade-offs have to be made. Everything cannot be priority. Both Ireland and Finland knew what their priorities were. They were willing to sacrifice other possibilities for growth and development in order to better pursue those priorities.

9.1.2Take into account the specifities of the environmentWhen making decisions about their growth strategies, both countries acknowledged

limitations and securities of their environment. After the WWII, Ireland was poor, rural society, without much industry and with weak economy. People were conservative and strongly influenced by catholic values that did not promote entrepreneurship or making money as a virtue. In that kind of environment, fast growth and industrial development were not very likely to occur. However, Ireland had significant location advantages, as a hub for American companies attacking European market. It had well educated, young and English speaking workforce. Moreover, many Irishmen that have emigrated to USA and other countries were still very patriotic and willing to help their motherland. Therefore, Ireland was well suited for attracting foreign direct investment.

Finland, on the other hand, was not an attractive place for foreign companies. Odd language, harsh climate, and low quality of living in comparison to its Scandinavian neighbors, discouraged MNC from investing in it. But it had entrepreneurial society, that was forward looking and relatively uncorrupted. It had people with vision, that were using informal networks to fulfill their dreams. Because of long distances and bad communications it was one of the leaders in mobile communications. In such an environment it was not difficult to promote knowledge sharing and cooperation among various actors in the society – something that would be impossible in Ireland, for example.

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9.1.3Social consensus (about goals and means)Distinctive feature of both economies is social consensus about priorities and means for

reaching growth. Rouvinen (1997) notes that ever since the recession in the beginning of the 90’s, growth was number one priority of society, pursued by all actors – government, companies, institutions and individuals. It was in that context that Nokia emerged as the leading engine of the growth. Government was willing to listen to it and attend to its needs. It formed some kind of partnership with Nokia, which still lasts. Although Nokia has threatened to move out of the Finland, it knows that it has much to loose from that move. All parties involved – government, Nokia, research institutions, people realize that they are depended upon each other and are trying hard to foster spirit of cooperation and knowledge sharing.

There was no such a broad social consensus in Ireland. But still, many leading scholars and decision makers in business and government had all agreed that the current strategy was the best one, given the circumstances.

9.1.4Consistency of policy over time Ireland has started to attract FDI in the beginning of the 60’s. It has done so for more than four

decades. In that period different governments, with different political agendas were in power. But they have never tried to radically change the direction. Even during the recession in 80’s, when FDI policy was deemed failure, it was not abolished. Of course, some changes were made, as economy evolved from first to third stage of development (Porter, ????), but the basic direction remained the same. It is only in the last decade that Ireland is more vigorously promoting growth of indigenous industry, but it has never stopped actively attracting new FDIs into the country.

9.1.5Strong education system (effective and efficient)Both countries pride themselves with efficient and effective education system. It produces

high quality graduates and is able to quickly react to changing needs of the businesses. Both countries have above average proportion of technical vs. humanistic graduates.

9.1.6Creation of favorable business environmentBoth countries have consistently tried to minimize obstacle to conducting business. They have

reduced government bureaucracy and promoted cooperation among various stakeholders. They have adopted modern business legislation and are very efficient at enforcing the law. Therefore they have “levelled the playing field” and promoted healthy competition

At the same time they have heavily invested into infrastructure. But not into roads, like other countries at the second stage of the development have thane. Ireland does not have great roads, except around few major industry centres, and Finland’s geography makes it impossible to create and sustain extensive first class road network. Both countries have rather leapfrogged or skipped that stage and concentrated in investing into modern ICT technologies, that gave their enterprises significant competitive advantage and allowed them to develop faster than their competitors.

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9.2 Specific factors

Specific factors that have contributed to growth either Ireland or Finland were already discussed in length in previous sections.

For Finland they are: Focused innovation Bottom up strategy Commercialization of products Transfer of knowledge (comp – comp + comp – university) Positive networking Adaptive capacity of the society Entrepreneurship Vision

Specific success factors for Ireland are: Top down strategy FDI Linkages EU subventions (transfers)

Finland and Ireland have chosen different strategies, but the final result is almost the same. Finland has become attractive place for foreign multinationals. It is getting more on more FDI, because those companies want to tap into the Finish knowledge base. On the other side, because of spill over effect from foreign multinationals Ireland has finally succeeded in developing a thriving indigenous industry that is not yet growing as fast as the overall economy, but still twice as fast as the EU average. It has succeeded in introducing entrepreneurial culture among traditional and catholic people. And the share of R&D activities done either by domestic or foreign companies in Ireland has increased dramatically.

Based on their starting position and historical conditions, Ireland and Finland have chosen two different approaches to increasing growth and competitiveness. However, it seems that they have ( both reached (or would soon reach) the same end – knowledge based society on the third stage of the development, where further growth and competitiveness are increasingly dependant on innovative capacity of economy and not on natural resources or other traditional factors of competitiveness.

10WHAT COULD SLOVENIA DO

Competitiveness of a country can only be increased through coordinated actions of government and enterprises. Government can only strive to create favorable business environment and help companies become more competitive through reducing market imperfections (eg. lack of financing for small companies), or offering incentives for creating of social, human and technological capital (eg cluster policy). It must do so in clear and transparent way, in order not to destroy market relationships by arbitrary helping some and not helping other companies. Government alone cannot

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increase competitiveness. That is the task of individual companies, which should be able to use government incentives, not for the short-term cash benefits but for the long term of increasing their competitiveness on international markets.

Slovenia has done some remarkable progress in the last decade. It is the one of the most successful transitional countries. But our analysis has shown that Slovenia still has a long way to go before becomes it enters the third stage of development and join the exclusive club of top competitive countries in the world. Factors that hamper Slovenia’s growth are many and diverse, from cultural to macro-economical ones. We have already mentioned some of them. Others are discussed in other literature. Here we would like to repeat some cultural factors or “background institutions that are hindering growth and are relevant for decision makers on all levels – national, local, and enterprise:o lack of trust in society and between companieso networking for personal interests (in opposition to networking for corporate interests as in Finland)

o lack of entrepreneurial spirit & desire for business growtho risk aversion and self-censure o apathy, passiveness and acceptance of status quo

It seems like thinks have been almost too good for us and we feel no real need for change. We are doing well and that might harm us in the long run.

Government has already introduced many initiatives to improve our competitive position. Our national strategy is modern and sound one. But almost all countries have similar strategy and final goal – prosperity and wealth of its people. It is the implementation, numerous tactical decisions and processes that make a difference. Although it is usually government that is initiator of various actions, improvement of competitiveness is the task of all stakeholders in the country – government, local authorities, enterprises, managers, entrepreneurs and people. As the case of Finland has clearly shown, coordinated actions and cooperation between various agents in pursuing various programs is the fastest way to the success and wealth of nation.

It is beyond the scope of this paper to give comprehensive prescription for improving Slovenia’s competitive position. Instead, we are listing just a few suggestions. Some of them are more general, well known and obvious, while some are more specific and daring. They are presented here as a starting point for discussion about what are managers and government officials doing and what they are not doing to increase Slovenia’s competitiveness. Slovenia has done a lot. But can it do more?

Process BenchmarkingSlovenian government has focused on benchmarking of strategies and the results can be

already seen. It has to be said that government strategies for any field are very good and comparable to strategies of the most developed countries. However the implementation of these strategies is not as good as in other countries, and most often reality doesn’t resemble the strategies on paper. We agree that strategies and goals can be and should be set according to what other countries do, but we should always take into consideration the current conditions in Slovenia and pay a lot more attention to how benchmarked countries implement the strategies.

Even though the government is very good at benchmarking strategies and goals it failed to develop an efficient system to foster the achievement of set goals, a system of strategy and

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results evaluation. We propose that process benchmarking should be implemented, which means the comparison of practices, procedures and performance, with specially selected benchmarking partners, studying one business process at a time. In plain words: this means that bureaucrats, those who directly perform the execution of strategies, should go to benchmarked country’s peers and analyze their procedures (how public competitions are stated, how companies are selected, how the evaluation system works, etc…)

Process benchmarking has many advantages: allows a focus on something that will make a significant difference to organization

effectiveness enables a detailed examination of the drivers for success and efficiency change arising from process benchmarking is generally readily accepted by employees

and management. creates opportunities for both individual and organizational development.

On the other hand there are also some disadvantages: If it is done correctly it is quite lengthy and takes more time than one would think it should, and to be done properly significant staff resources are used.

However the Government should try to avoid some pitfalls like rushing to compare with partners without an intimate knowledge of its own processes or picking partners for convenience rather than for excellence.

Create Slovenian development bankEconomic growth and development at the third developmental level depends on the innovative

capacity of the society or the enterprises within that society. It can be ensured through financial means that derive from the capital market, or through the help of banks through a credit system. As we saw in previous chapter Slovene financial system poorly supports the economic development and competitiveness (it ranks 38th among 49 countries).

Jaklič (2002) argues that SMEs should be the future drivers of development in order to step on innovation – driven level. Enterprises must be at the top of innovation in individual segments of the world market, they must develop a unique design for products, they must have a leading position in individual global niches, and they must have decentralized, flexible, and innovative organizational structures. Enterprises must have strong support at universities and research institutes, which must attain top quality with related institutions around the world in individual areas. It is necessary to demonstrate one's own innovative capacity in the development and commercialization of technologies, products, services, and managerial knowledge.

The data indicate that in EU countries on average 99.8% of all enterprises are SMEs, which represents 66% of all employees and about 50% of the GDP, whereas in Slovenia the share of SMEs is 93.6%, which represents 23.2% of all employees and creates 22.8% of the GDP Nevertheless, Slovenia has currently slow, but positive innovation dynamic. In the past ten years has the SME sector created the greatest number of new work positions, and in addition to this their share of the GDP has also increased, which however remains relatively small.

A survey of enterprises has show that entrepreneurs see the following elements as the greatest impediments to development: an undeveloped financial and capital market, a lack of developed

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institutions that could assist in commercializing scientific and technological ideas, and a lack of transparency in state policy in the field of SMEs (Kotar in Jaklič, 2002).

Since one of the major problems in Slovenia is lack of financial resources, that would be prepared to fund risk projects including establishment and expansion of SMEs, Jaklič (2002) proposes establishing of Slovenian Development bank as a complement to existing financial institutions.

Role of development bank would be in generating future development, stimulating and implementing innovations, establishing confidence among economic subjects and in their relation to SMEs, establishing an innovative environment in local communities, and constructing the future economic identity of the country. 39. The mission of the bank is not to realize profit, but rather to fund the potentially successful projects of establishing and expanding SMEs, which are of vital significance to the national economy in the sense of opening new workplaces, introducing new technologies, accelerating innovation, commercializing development projects, increasing the international competitiveness of Slovenian enterprises, increasing exports, and heightening prosperity and the quality of life in Slovenia. The goal of the bank is to offer assistance to potentially successful entrepreneurial projects that do not seek classic venture capital (or are unable to receive it) and wish to retain a high level of discretionary power in decision-making in the enterprise as well as the possibility for later repurchasing.

However, besides the establishing of Slovenian Development Bank also the whole financial sector should restructure in a way that would enable the financing of risky projects and support SMEs.

Promote entrepreneurial cultureAs was already mentioned, nation's competitiveness depends on the capacity of its industry to

innovate and upgrade, and the biggest source of this processes are entrepreneurs. In Slovenia the Ministry of Economy is stimulating development of the entrepreneurial sector through state incentives within the framework of four programs. These are programs for: Increasing the competitive capabilities of enterprises, Stimulating technological development and innovation, Promoting entrepreneurship, Stimulating the development of tourism.

The program for promoting entrepreneurship seeks to remove barriers that hinder the more rapid development of entrepreneurship. The goal of the program is not only to ensure access to financial resources, but also education and advising. Support is directed toward three groups of enterprises and entrepreneurs: small and medium-sized enterprises, successful entrepreneurs, and young entrepreneurs Jaklič (2002)40.

Unfortunately the public opinion in the Slovenia does not yet cherish the idea of the entrepreneurship. The fear of change and mostly of failure is still rooted very deeply; therefore the process of creating the new entrepreneurial culture must inevitably be a long one. But that is also a reason why that very process of creating the new entrepreneurial culture must be given special attention of all actors. Beside government also other institutions, local communities, companies, etc need to focus on promoting entrepreneurship and innovations. To increase the awareness of the entrepreneurship in people's minds, it is urgent to enhance the sprit of enterprise and innovation in

39 For more about banks services, activities, etc. see Jaklič (2002).40 For explanation of other programs see Jaklič (2002).

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education as well as in public opinion in the widest sense of the word. Proposals for possible actions are:

Local communities and SMEs can organize ‘company open-house day’. This events would allow local population to become familiar with the inside workings of SMEs and with company CEOs in their region. Furthermore SME managers need to be involved in supporting of different social, cultural, political and sport activities with a purpose of developing social responsibility.

Educational institutions need to promote the entrepreneurial spirit among young people during their entire period of studies (from primarily level on)41. Beside that a closer relationships between engineering schools (whose students are a potential source of technological innovation) and business schools should be established in order to achieve profitable cooperation.

Local communities need to create and support entrepreneurship friendly environment. As Jaklič (2002) states ‘inhabitants of local communities must be aware that the entrepreneur, as a microelement, is the main impetus for local prosperity, which requires the support of the environment’. It is necessary to direct all energies toward the development of local innovative capacities and non-mobile sources that will attract foreign as well as domestic enterprises to engage in activities with the highest added value on Slovenian soil.

Involve media more into the promotion of the positive entrepreneurial culture. Some Slovene newspapers are already trying to promote ‘gazelles’, but companies does not see this as a challenge, because it mainly brings them envy and attention of tax authorities.

The need to develop entrepreneurial skills and upgrade qualification of the labor force need to be a central element in order to increase Slovenian competitiveness and to step to the third level, the innovation driven economy.

Educating people for using European union fundsThe European Union regional policy is based on financial solidarity in as much as part of

Member States contributions to the Community budget goes to the less prosperous regions and social groups. For the 2000-2006 period, these transfers will account for one third of the Community budget, or €213 billion (European Commission, 2002).

Those funds are mainly for the EU members, but large amounts are provided also for applicant countries with goal to improve their standard of living. There are two different parts of EU incentives before and after joining EU. The estimates are, that Slovenia could receive from various European funds up to €500 millions per years– if would become EU full member (Benko, 1999). So large EU funds are and will be available for Slovenians, but here we can put the question how many Slovenians are aware of that? Education of the people for using European Union funds should be included in all management and entrepreneurial schools, and also in all other programs, because often start-ups are

41 An example how this is done in UK (CCIP, 2002) (http://www.ccip.fr/dircom/ch_cu_uk.htm): Primary education: The "Primary School Enterprise" experiment carried out by the University of Durham in the United

Kingdom, offers instructional tools to teachers and pupils, with the assistance of large companies. Secondary education: They organize monthly sessions, which are devoted to becoming familiar with companies. They

put the accent on each person's ability to innovate in all fields, by freeing initiatives from the constraints of academic teaching (visits to companies, experiences of entrepreneurs, role-plays, group projects).

Higher education: Training in the entrepreneurial spirit, as a subject in its own right is part of the third level education.

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made from engineers or others, not familiar with several options. They consider bank loans and/or personal assets as best option, but they neglect Slovenian and especially European funds.

Create a shared long term vision, based on knowledge and innovationVision of a nation as a common denominator and motivator of all its members plays a

substantial role in positioning national economy and nation as a whole on the Porter’s third developmental level. We can compare vision of a nation with organizational mission statement that guides the organization. However, the vision of a nation without well defined strategic goals (where it want to be) and strategic plans (how it will attain its strategic goals) is toothless giant.

It looks like that in Slovenia is possible to built support and consensus for giant and capital-intensive mega projects, but only if the existing centers of economical, political and cultural power are not endangered and if their partial interests do not suffer. Typical example of the above thesis is a highway project, which brings a lot of political points, enables that quite a big part of Slovenian economy live comfortable and without of pretentious internationalization, and make possible that average Slovenian citizen has a feeling of good life.

However, the biggest national project is short term oriented and has a lot of “negative effects on Slovenian environment, economy and on sustainable development of Slovenia” (Development Report, 2002)

Therefore, creation of shared long term vision, based on knowledge and innovation is crucial for Slovenia. It seems like this is Slovenia’s only chance, that when it will become a full member of the EU, it will be able to compete in highly competitive European environment. Currently the most important Slovenian priority is to become the EU member, even though it is probably even more important to answer the question, how will Slovenia survive in the European environment.

To conclude this chapter we recommend that competent institutions with strong support of government prepare a project of creation of long term vision, based on knowledge and innovation, which will be able to face the challenges of the future and will be based on strong grass-root support. One of the most important challenges of this project will be how to built support for long-term benefits even at the costs of short-term sacrifice.

Nice model of broad support building is SITRA’s project Finland 2015. The objective of the program is to develop the knowledge, skills, resources and networks of senior Finnish decision-makers in issues concerning the future of Finnish society. SITRA has set itself the goal of placing Finland among the three most successful nations in the world by the year 2010.

In one sentence: State is responsible for providing opportunities to its citizens to develop their full capabilities … and by doing they will strengthen the nation/state as well.

Define perspective new industries and deliberately develop them As we have already mentioned in the text above, Slovenia is lagging a lot behind the most

developed countries regarding invested R&D funds focused into perspective new industries. This

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could be explained by demanding challenges of privatization, denationalization, restructuring and other transitional challenges, Slovenia was faced with in the 1990’s.

However, as we have argued throughout this article, investing in cutting-edge ICT, rapid innovation cycle and brutal commercialization of newly developed products were key success factors of Finland and also Ireland.

Thus it is essential that Slovenia through support building for new nation’s vision define perspective new industries, on which Slovenian well being of next decades will be based. And focus all its financial strength to deliberately develop them - some perspective industries like energy saving technologies, nano, bio and ICT technologies have the biggest growth potential and market value. This not necessary mean that all existing old industries have to suffer – probably compromise to some extend should be made with existing economic elites. But clear and credible commitment to new industries should be made, in contrast with some questionable projects in last decades like revitalizations of ironworks, state subvention to Litostroj (heavy iron equipment), TAM (truck factory), Metalna (heavy iron equipment)…

Commercialization of new product developmentCommercialization of new products is business-driven. The best model of this is Finland,

where state deliberately foster spending of R&D founds in technology aware companies. The R&D funding has been strongly focused to national research and technology programs, which have turned out to be productive and functional. We believe that Slovenia could learn very useful and practical lessons from Finnish model.

Why has been Finland so successful in commercialization of new products? Because of systematic relocation of the funds for R&D from Public sector and University sector to Private sector. In the year 1991 only 57% of Finnish R&D was spent in Private sector, comparing to 72,9% in the year 2001.

From Finnish model we could argue that without relocating a big majority of R&D activities into business entities there is little hope for Slovenian success in commercialization of new products. We have to have in mind that this argument is based on hypothesis that business entities are the most competent and have the strongest interest for success of commercialization of new products. Consequently, nation gets the highest return on R&D investments through collection of taxes and other contribution, which could be usefully spent again.

From Finnish model we could also argue that Finland is so successful in the last decade because of increase of GDP share for R&D expenditure, which has increase from 2,04% to 3,65% of GDP in 10 years (Finland is second nation in the world regarding this criterion). We have to stress out again that this strong commitment to knowledge-based society was possible primary because firm social consensus about national priorities.

We argue that even though Slovenia invested historically the highest funds into R&D activities in the year 1999 (1,51% of GDP), this is not enough to stay competitive on the long run.

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Promote entrepreneurial culture and connect outstanding peopleEven though Slovenians in general do not have a well developed entrepreneurial spirit,

there are always some individuals, who have it and represent the driving gear of prosperous SMEs. Moreover, this individuals feel a need to grow and have ambitions reaching much further than their own economical wealth. Some of them, feeling that alone are weaker, are already trying to establish connections with other similar entrepreneurs and together achieve some common goals. However in spite of proverbial Slovenian smallness it is often difficult and extremely time consuming to find adequate partners.

Interconnected SMEs are in many regions all over the world the driving force of hi-tech economy and there is no reason why this couldn’t be a fact also in Slovenia. The government should try to spot the most outstanding individuals and try to connect them. This could be done through interesting business conferences with direct invitations or through government or even EU-funds sponsored projects, that would require multiparty involvement. When brought together, the government should stimulate them to cooperate, finance their joint projects and help them at achieving set goals.

Improve knowledge transfer A high level of innovativeness is one of the major assets of national economies in the

competition with other economies. Knowledge flows are crucial for innovations. Thus, it is important for national economy systems to improve knowledge flows and be able to profit intensively from such flows.

Government has to implement such a knowledge transfer policy that will provide for sources of knowledge (R&D, universities, institutes, NGOs, foreign sources) and also establish an environment favorable to knowledge transfer.

An effective knowledge transfer policy should include both: the supply-side and demand-side approach.

In the supply-side approach R&D activities carried out by state institutions are intended to create new knowledge or technologies which may contribute for the mission of the state, to foster innovation and the productivity of the private sector. The emphasis is on development of technologies.

The demand-side approach emphasizes co-operation by the state to improve the availability, adoption and use of technologies by SMEs, and activities to encourage investment in technology, education and information infrastructure.

As much attention should be given to finding, acquiring, adapting and using technology as to creating it. But most of all policy should be shifted to activities that are better designed to help firms acquire and use available technology and thus putting them on the technological cutting edge.

To purchase and use technologies already developed is a speedy solution for many SMEs and looks the most attractive for Slovenian enterprises. The highly advanced technology, though expensive to purchase, would put Slovenian firms by technology on par with foreign ones and thus give them a better chance to develop a sustainable competitiveness through innovations. However, many SMEs may have trouble with:

the formulation of their problem in technological terms, examining the available technologies relevant for the solution of their problem, identifying suppliers of technologies, negotiating conditions and price with the suppliers of technology,

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adapting the technology, training the personnel.

Here should public institutions play their role and help SMEs, willing to take the challenge, at overcoming initial problems.

To improve knowledge flows and establish a knowledge based economy the government has to: play as knowledge broker - as an intermediary who deals with already developed

technologies, both in the supply and demand sides, and may support the companies up to the signature of the agreements or contracts

play as a facilitator and catalyst of knowledge transfer – since in Slovenia nor the private nor the NGO sector are not yet well developed in the field of knowledge/technology transfer, the government should when possible play the role of and stimulate the organizations which provide technology transfer referrals and information; technology transfer consultants and technology transfer conference organizers

create an innovation supporting environment – promote technological faculties, business incubators and research parks, information documentation centres,

implement an efficient incentive system – with an appropriate taxation and subsidy system the government should motivate companies to invest in R&D and especially to collaborate at R&D and commercialisation projects

support commercialisation

Regional development agencies are already established, but they are many and very poorly interconnected. Moreover there is little connection between these agencies and SMEs. Agencies perform a lot of studies and researches which usually end only in archives and are not usefully implemented in practice. The government should use these agencies in a more efficient way and finance only those projects that have an impact on the private sphere or are done together with the private sector.

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11REFERENCES

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Documents

Benchmarking countries - University of Ljubljanawebv1ef.ef.uni-lj.si/dokumenti/wp/paper_new.doc · Web viewBENCHMARKING DRŽAV: PRIMERJAVA KONKURENČNOSTI IRSKE, FINSKE IN SLOVENIJE