Industrial leaders and industry associations often call for better policies to drive growth and productivity. However, the irony lies in the fact that these very sectors are often the root cause of low productivity.
Finland’s economic stagnation over the past decade has roots deeper than commonly acknowledged. Despite a stable standard of living, the country’s market production has contracted, leading to a stagnation in per capita GDP since 2007 a study from the Finnish Innovation Fund, Sitra, reveals. This stagnation is not merely a cyclical downturn but a structural malaise, particularly in the efficiency of production. Total productivity, a measure of market output relative to inputs, is 10 percent lower than in 2007, a stark contrast to the gains seen in peer nations.
The financial crisis and subsequent euro area debt crisis of 2008–2013 dealt a blow to productivity across the globe. However, while other economies have rebounded, Finland’s productivity remains in the doldrums. A significant portion of market sector production has seen a decline in productivity from 2014 to 2023, and even sectors with growth have lagged behind international peers.
The Innovation Conundrum
Finnish industry is heavily reliant on government subventions and public funding for innovation. Unfortunately, these grants are often low in ambition and politically driven, prioritizing political objectives over market needs. Despite substantial public funding and university collaboration, innovation has not yielded the desired progress, and in some cases, has regressed.
To foster a more dynamic and innovative industrial sector, there needs to be a shift towards more ambitious and market-oriented funding strategies. This includes increasing the scale and scope of public funding for high-risk, high-reward projects and reducing bureaucratic hurdles that stifle innovation.
Capital productivity, measured by the output per capital input, is highest in successful transformational and adjacent innovation initiatives. However, these initiatives are rare due to the short-term constraints of OPEX-based funding. Companies focused on quarterly earnings and efficiency metrics tend to underinvest in disruptive ventures, missing out on long-term opportunities and productivity increase. Innovation projects are often evaluated based on immediate ROI rather than strategic potential, leading to a focus on incremental improvements rather than bold new ventures. In the worst case, these incremental improvements and core R&D efforts are concentrated on sustaining innovation, which primarily aims to enhance production processes. This approach, while beneficial for operational efficiency, falls short in creating superior products that can capture new market shares and open up new markets.
The Cure to Stagnation
Corporations that fund innovation through OPEX are inherently risk-averse. Since OPEX is expensed in the same fiscal year, investments must provide quick returns, which limits the ability to invest in moonshot projects with long development cycles, build entirely new revenue streams that take years to materialize, and attract external venture talent accustomed to startup funding models. By treating innovation as an operational cost, companies fail to create the necessary conditions for disruptive innovation to thrive. This results in a cycle where startups and venture-backed companies continue to outpace corporations in emerging market opportunities, ultimately contributing to higher productivity.
By shifting innovation funding to CAPEX, corporations can maintain control over disruptive market trends rather than merely reacting to them. This approach allows them to compete with venture-backed startups by operating on similar long-term financial principles. Additionally, it ensures financial sustainability for high-risk projects, thereby increasing the likelihood of significant breakthroughs.
Creating a culture that embraces innovation is critical for long-term success. This involves fostering an environment where experimentation and risk-taking are encouraged, and failure is seen as a learning opportunity rather than a setback. Companies need to invest in talent development, providing employees with the skills and resources needed to innovate. This includes continuous learning opportunities, access to cutting-edge technologies, and a supportive organizational culture.
Conclusion
Shifting innovation from OPEX to CAPEX enables corporations to break free from short-term pressures and commit to truly transformative growth. By allocating innovation funds as CAPEX, businesses can maintain the agility of startups while leveraging the financial stability and resources of a corporate entity.
Call to Action
It’s time to rethink our innovation portfolios and elevate our ambition levels. By separating adjacent and transformational initiatives from core business R&D, we can foster an environment where bold, disruptive innovations can thrive. Let’s commit to a future where Finnish industry leads in innovation and productivity.
