© I. Tuomi 9.5. 2002 page: 1

Innovation and DevelopmentInnovation and Development

Strengths and Weaknesses in the Finnish InformationSociety

Ilkka Tuomiilkka.tuomi@jrc.es

© I. Tuomi 9.5. 2002 page: 2

AgendaAgenda• Sources of success: the roots of rapid socio-economic transformation in

Finland• Some personal observations on the history of the Finnish information

society• An important detail: case Nokia• New dynamics of innovation networks

• A few words on Internet-related innovations and the open sourcedevelopment model

• Challenges for the Finnish model and innovation policy

© I. Tuomi 9.5. 2002 page: 3

From Agriculture to Industrial SocietyFrom Agriculture to Industrial Society

Labor force in Finland, 1950-1995

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1950 1970 1975 1980 1985 1990 1995

Year

Num

ber o

f per

sons

46 % in broad agriculture in 1950

7 % in broad agriculture in 1995

Total employed

Agriculture, fishing, animal breeding, and forestry

© I. Tuomi 9.5. 2002 page: 4

From Agriculture to Industrial SocietyFrom Agriculture to Industrial SocietyLabor force in Finland, 1950-1995

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1950 1970 1975 1980 1985 1990 1995

Agriculture, fishing, animalbreeding, and forestryTotal employed labor force

46 % in broad agriculture1950

7% in broad agriculturein 1995

© I. Tuomi 9.5. 2002 page: 5

Nordic Welfare State in Finland,Nordic Welfare State in Finland,1965-19751965-1975

• Baby boom of 1945-1955• Expansion of the public sector• Increasing levels of education• Investment in regionally balanced university system, libraries, culture• Rapid urbanization• Shared experiences of war and relocation of people who lost their homes

Education

Life opportunities(work, identity,..)

Infrastructure fordevelopment

© I. Tuomi 9.5. 2002 page: 6

The baby boom in 1960sThe baby boom in 1960s(and the aging of the population)(and the aging of the population)

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,000

1950 1960 1970 1980 1990 2000 2010 2020Year

Num

ber

of P

erso

ns

0-14 years65+ years

© I. Tuomi 9.5. 2002 page: 7

Characteristics of the Finnish Culture inCharacteristics of the Finnish Culture inthe 1980sthe 1980s

• Small cultural and economic differences• High social mobility through education• Low hierarchy and open communication culture• High trust culture

• Non-existent corruption• High trust on public services and institutions• Low crime rates

© I. Tuomi 9.5. 2002 page: 8

Crime in FinlandCrime in Finland

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20010

10

20

30

40

50

60

70

80

90

Registered crimesSolved, %

0.10 crimes per capita1980

0.15 crimes per capita2000

© I. Tuomi 9.5. 2002 page: 9

Technical Infrastructure, 1980sTechnical Infrastructure, 1980s• 1978: The Finnish Technology Committee introduces the theme of

"Information Society" (inspired by Nora – Minc: L’Informatisation de la société)• 1980: Telset videotex service started (similar to Minitel, 1981)

• Computer networks• Public data network launched in 1983• Ministry of Education launches FUNET, the Finnish University Network,

1983• FUNET links the Finnish university computer centers, 1985• 1988: Finland gets access to NSFNET/Internet, in a joint effort by Nordic

countries (first countries to join the net: .ca, .sw, .dk, .no, .ic, .fi, .fr)• 1988: "General information network and the citizen's knowledge terminal"

-project. This leads to broad development of information services,commercial e-mail systems, electronic banking, etc. In 1988 it waspredicted that about 20 per cent of the Finnish population will be users ofthe information network by 2000.

• 1988: Online share trading starts in Finland

© I. Tuomi 9.5. 2002 page: 10

Technical Infrastructure, 1980sTechnical Infrastructure, 1980s• Telecommunications

• Nordic Mobile Telephone (NMT) system launched 1982• Competition starts in digital communications (X.25 packet-switched

networks), 1985• New telecommunications law, 1986• Ministry of Traffic and Communications orders the competing digital

networks to provide connections between the networks, 1989

© I. Tuomi 9.5. 2002 page: 11

Some Internet MilestonesSome Internet Milestones• 1988: Jarkko Oikarinen distributes IRC (Internet Relay Chat, University of

Oulu)• 1991: Linus Torvalds distributes the first version of Linux (University of

Helsinki)• 1992: First graphical WWW-browser developed (Erwise, Helsinki University of

Technology)• 1992: FUNET and Helsinki University of Technology launch the 5th and 8th

WWW –servers in the world,(first three are CERN, 4th is Dutch High-energy physics)

• 1993: The First "Information Society Strategy." Focus on information andcommunication technologies and related competencies (similar to NII).

• 1993: A "drivers license" for information networks (consists of seven modules)• August 1998: Finland is the first country where mobile phone penetration

exceeds 50% of the population

© I. Tuomi 9.5. 2002 page: 12

Mobile Phone PenetrationMobile Phone Penetration

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Finland 3 2 2 1 3 3 1 1 1 1

Sweden 1 1 1 2 1 1 3 3 3 4

Norway 2 3 3 3 2 2 2 2 2 2

Island 4 4 4 5 6 6 6 7 4 3

USA 7 6 5 6 5 5 8 9 14 16

Source: OECD, 2000

© I. Tuomi 9.5. 2002 page: 13

Evolution of Linux Source CodeEvolution of Linux Source CodeKernel distribution size (compressed)

0

5

10

15

20

25

7-May-90 19-Sep-91 31-Jan-93 15-Jun-94 28-Oct-95 11-Mar-97 24-Jul-98 6-Dec-99 19-Apr-01

Mill

ions

of b

ytes

© I. Tuomi 9.5. 2002 page: 14

Electronic Banking in Finland:Electronic Banking in Finland:customer transactions in 1998customer transactions in 1998

91

37

6 0.7

ChecksATM cardsTransfersDirect debiting

1982: Telephone banking1988: Online share trading1992: Banking by mobile phone1996: Internet banking

Great Britain 1997:over 30 % checks

30.5

31.1

19.6

18.7

© I. Tuomi 9.5. 2002 page: 15

Electronic Banking in Finland (2)Electronic Banking in Finland (2)• 82 % of transactions were paperless in 1998• Within EU, the amount of cash in circulation was the lowest in Finland: 2.35

per cent of GDP (in Spain 10.7, average EU 5.2)• On-line invoicing 1998

• You buy through the net, get a bill as a web form, accept it, and your bank accountis debited by the amount transferred:

• both the payee and payer are verified through the bank; (today you can also do thisusing your mobile phone)

• At the beginning of 1999, the biggest bank in Finland had about 600,000online customers; this was the biggest customer population in the world, inabsolute numbers.

• To compare: US has 50 times bigger population than Finland

© I. Tuomi 9.5. 2002 page: 16

Why Finland Became a Leader inWhy Finland Became a Leader inElectronic Banking?Electronic Banking?

• In Finland, work is expensive (heavy taxation)• Wide use of computer applications to support bank operations and customer

service (1970s- )• High return on investment in ATMs (Automatic Teller Machines; 1980s- )

• Reliable telecommunications infrastructure• Digitalized networks widely available

• Competition in banking• Cost competition• No monopolies

• Close ties between Finnish ICT manufacturers and banks• Good knowledge of ICTs potential (1970s - 1980s)

• In Finland, money is information• transfers widely used in 1970s• everyone has one or more bank account• reliable institutions (no need for physical money)

© I. Tuomi 9.5. 2002 page: 17

End-User Costs for Internet AccessEnd-User Costs for Internet Access

Source: Petrazzini & Kibati:Communications of the ACM, June 1999Vol.42 (6), p.31-6.

© I. Tuomi 9.5. 2002 page: 18

Recession and Safety NetsRecession and Safety Nets“The Finnish Trampoline”“The Finnish Trampoline”

Change in employment

-8-6-4-202468

10

1990 1991 1992 1993 1994 1995 1996 1997

annu

al c

hang

e, %

All sectors Information sector

Between 1990-1994 household income dropped 18 % in Finland;due to income transfers, however, the usable income dropped only 10 %

© I. Tuomi 9.5. 2002 page: 19

Some Drivers in the FinnishSome Drivers in the Finnish ISoc ISoc• Culture

• common interest in technological opportunitiesIn Finland you don’t survive the winter without planning

– Finland had its first telecom operator 3 years after Bell invented thephone

• open communication culture, effective communicationPeople don’t talk much; when they do, they mean what they say

• high level of education• low hierarchy• homogeneous culture• shared expectations

© I. Tuomi 9.5. 2002 page: 20

Some More DriversSome More Drivers• Institutions

• Deregulation of telecom (started 10 years before the EU)• Acute need for change

Disappearing USSRAt the beginning of 90’s, deregulation of financial markets created a

“bubble economy”• Nordic countries are egalitarian and emphasize social responsibility

Heavy investments in the educational systemWell developed library system (over 80 % of public libraries offer free

internet access)Non-existent illiteracy (in Finland newspaper circulation is 473 per

1000, in the US the number is 228)

© I. Tuomi 9.5. 2002 page: 21

Newspaper circulationNewspaper circulationper 1000 inhabitantsper 1000 inhabitants

0

100

200

300

400

500

600

UK

Spai

n

Irla

nd

Ital

y

Fran

ce

Swed

en

Finl

and

19901998

© I. Tuomi 9.5. 2002 page: 22

…and even more……and even more…• Economy

• critical mass of networked people (the biggest community in the world?)– about 100% of primary and secondary schools have Internet access

• low income differences: growing, but still small– 1994: top-ten percent had 3.9 times the income of bottom ten percent– 1997: the ratio was 4.6– this leads to shared lifestyles, easy propagation of new ideas and products

• high taxation on work– investment in technology instead of human work; this is a big difference

between Europe and the US– taxation, however, makes good public infrastructure and services possible

• low telecom tariffs– about half of the OECD average– caller pays: no need to hide your phone number– Nordic countries were the first to deregulate telecom, digitalize telecom

infrastructure, and start international competition• Nokia

© I. Tuomi 9.5. 2002 page: 23

R&D expenditure by sector R&D expenditure by sector EUR MillionEUR Million

0

1000

2000

3000

4000

5000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Universities Public sector Private sector

© I. Tuomi 9.5. 2002 page: 24

Finland as a Breeding Ground forFinland as a Breeding Ground forNokiaNokia

• Mobile communications and digital transmission systems developed inFinland from 1960s

• Joint effort to get a Nordic mobile phone system in place (starting at theend of 1970s)

• Fairly open competition among operators and equipment suppliers,promoting innovation and diffusion of new technology

• Close supplier-operator collaboration, leading to effective user-producerlearning

• Close interaction between firms, universities and research institutes,leading to effective competence development and utilization of state-of-the-art technology and know-how

• Flexibility in the adjustment to the new techno-economic environment• Availability of skilled human resources• Enthusiasm of Finnish organizations and consumers to adopt new

technology

Modified from: Tarmo Lemola, Ministry of Trade and Industry, Finland, 17.4.2002

© I. Tuomi 9.5. 2002 page: 25

Finland as a Breeding Ground for NokiaFinland as a Breeding Ground for Nokia(2)(2)

• Laying the infrastructure for rapid growth• Broad competence development in ICT in 1970s-1980s• Entrepreneurial innovators (often with radio-amateur background)• Active redefinition of Nokia’s strategy in the 1980s towards consumer electronics,

communication, and personal computers• Active globalization of Nokia’s business in the 1980s• Evolving international R&D collaboration (in particular in the EU research

programmes)

• The Nokia crisis of 1991• leadership crisis in Nokia• unprofitable consumer electronics division• disappearing Soviet Union market

• Nokia in 1992• a quick reorientation to global growth markets• new top management team• focus on mobile communications

© I. Tuomi 9.5. 2002 page: 26

Finland as a Breeding Ground for NokiaFinland as a Breeding Ground for Nokia(3)(3)

• The Finnish economic crisis of 1992-1994• Over 20 % (official) unemployment touched all Finnish families and

created a pool of highly educated unemployed people• General crisis consciousness, with ICT (Nokia) as the only economic

growth sector• Rapid adjustment of educational system towards producing ICT

competencies• National high-profile policies on making Finland the leader in the

information society transformation• Policies and societal atmosphere pro-ICT and Nokia• Taxation system that ensured “trickle-down”

• Extremely rapid growth of mobile telecommunications

© I. Tuomi 9.5. 2002 page: 27

The Nokia MiracleThe Nokia Miracle

CrisisInstitutional andOrganizational

Flexibility

BusinessOpportunity

Technological& market

discontinuity

Competent labor and managementSocial capitalLow hierarchyOpen communication

Organizational& environmental

crisis

© I. Tuomi 9.5. 2002 page: 28

GDP 1985=100GDP 1985=100 (at market prices per capita)(at market prices per capita)

100

110

120

130

140

150

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

*

Finland EU countries

Source: Tarmo Lemola, Ministry of Trade and Industry, Finland, 17.4.2002

© I. Tuomi 9.5. 2002 page: 29

Wood andwood productsPulp, paper andpaper products

Electronics andelectrotechnicalproducts

Other goods

Machines,machinery andvehicles

Basic metals andmetal products

Chemicals andchemical products

Services

Finnish Exports by IndustryFinnish Exports by Industry

05

1015202530354045505560

1992 1993 1994 1995 1996 1997 1998 1999 2000

EUR billion

© I. Tuomi 9.5. 2002 page: 30

Wood products

Pulp, paper andpaper products

Basic metals andmetal products

Other goods

Electronics andelectrotechnicalproducts

Machines,machinery andvehicles

Chemicals andchemical products

Finnish Exports of GoodsFinnish Exports of Goods% of total exports of goods

15 15 15 9 12

119

11

31

15

78

9

42

4030

312227

16 158

541

42

17

18

16

246

5

0%

20%

40%

60%

80%

100%

1960 1970 1980 1990 2000

© I. Tuomi 9.5. 2002 page: 31

R&D expenditure by sector R&D expenditure by sector EUR MillionEUR Million

0

1000

2000

3000

4000

5000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Universities Public sector Private sector

© I. Tuomi 9.5. 2002 page: 32

Nokia’s Contribution to the Finnish EconomyNokia’s Contribution to the Finnish Economy

• 1.1 % of total employment, 30 % of the ICT cluster employment (25,000employees in Finland)

• 300 first-tier partnerships in Finland (18,000-20,000 employees), 10 % ofNokia’s turnover

• 24 % of exports, 80 % of ICT cluster exports• 30 % of the total Finnish R&D, 43-47 % of the business enterprise sector• 50 % of the growth in total R&D expenditure• 54 % of the company’s R&D input is spent in Finland

Source: Tarmo Lemola, Ministry of Trade and Industry, Finland, 17.4.2002

© I. Tuomi 9.5. 2002 page: 33

Challenge: Jobless GrowthChallenge: Jobless Growth

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Year

Pers

ons

(thou

sand

s)

population, 15-74 yearsin labor force

"Worked one hour or more during the

survey week"

© I. Tuomi 9.5. 2002 page: 34

Challenge: Space MattersChallenge: Space Matters

Net movement ofpeople with post-secondary degrees1997-1999

”the killer app of the knowledge societyprovides access to life opportunities”

© I. Tuomi 9.5. 2002 page: 35

But,But,There is a new mode of technology andThere is a new mode of technology and

knowledge creation emergingknowledge creation emerging

Tuomi, I. (2002): Networks of Innovation: Change andMeaning in the Age of the Internet. Oxford University Press.

© I. Tuomi 9.5. 2002 page: 36

Two Different Dynamics of InnovationTwo Different Dynamics of Innovation• Innovation based on evolving specialization

• Requires gradual change of underlying social practices and stocks ofknowledge

• “Spin-off” from existing communities of practice• Combinatorial innovation

• Recombination of resources so that they become meaningful for existingsocial practices

• Recombination of resources so that they enable new social practices

• Silicon Valley has become specialized in the combinatory model• Little original technology and knowledge development but very rapid

experimentation with recombinations• Silicon Valley has a specialized role within a global innovation system; it

does not make sense as a social model

© I. Tuomi 9.5. 2002 page: 37

”Old Theory””Old Theory”

• linear innovation model• heroic inventors and entrepreneurs• idea generation – invention – R&D – marketing – diffusion

• separation between basic and applied research• economic and entrepreneurial theory of innovation

• e.g. patents (limited monopoly) needed for new innovations to emerge• adoption based on individual preferences and choices• corporate R&D units as focus of innovation

• product-centric view• focus on functionality and product attributes• focus on technological artifacts

© I. Tuomi 9.5. 2002 page: 38

Elements of the New TheoryElements of the New Theory• meaningful products

• interpretative flexibility• social practices and communities as the foundation of meaning• identity construction using artifacts• product adoption as meaning creation

• focus on down-stream resources and innovation capability• unintended dominant uses• adoption constrained by social learning and change capability in downstream user

communities• multifocal innovation model

• user-centric instead of product-centric• ”all innovation is social innovation”

• social dimension• control, coordination, power, and division of labor

• corporate R&D• integration with social innovation processes• management beyond organizational boundaries• demand articulation and platform innovations• flexible products

© I. Tuomi 9.5. 2002 page: 39

Linux DevelopersLinux Developersin the First Credits Filein the First Credits File

00.10.20.30.40.50.60.70.80.9

1nu

mbe

r of d

evel

oper

spe

r mill

ion

inha

bita

nts

Australi

aBelg

iumCan

ada

Denmark

Finland

France

German

yNeth

erlands

SpainSwed

en UK

USA

13-Mar-94

I. Tuomi. Internet, innovation, and open source: actors in the network. First Monday 6 (1), 2001.

© I. Tuomi 9.5. 2002 page: 40

Licenses Make Open Source PossibleLicenses Make Open Source Possible

GNU

BSD

ArtisticMIT

open source

freeware

shareware

not defined

PD

restricted

FRSGNUBSDArtisticMITopen sourcefreewaresharewarePDrestrictednot defined

Linux Software Mapdatabase at ibiblio.org

Tuomi, I. (2002): Networks of Innovation: Change andMeaning in the Age of the Internet.

© I. Tuomi 9.5. 2002 page: 41

Copyrights in the Copyrights in the Linux Software MapLinux Software MapRepositoryRepository

0

50

100

150

200

250

300

Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01

Not defined

ProprietaryFree distribution, no source

Open with restrictions\no modification

Open with restrictions\non-commercial

Open with restrictions\otherShareware

Public Domain

Freeware without explicit license

OS copyrightOS copyleft

Tuomi, I. (2002): Networks of Innovation: Change andMeaning in the Age of the Internet.

© I. Tuomi 9.5. 2002 page: 42

The Open Source ModelThe Open Source Model• Key factors driving rapid growth:

• Multi-focal user-centric innovation modelInnovation occurs where it makes a differenceLack of centralized decision-making makes knowledge, innovation, and

implementation local• Evolution instead of implementation of predetermined design• Successful “universal” interfaces facilitate recombination of resources

• Boundary conditions:• Tight control of core is needed to enable continuous growth in the

periphery• Standard interfaces (technical and procedural) necessary to reduce

complexity and to translate sub-networks into resources• Requires constraints that substitute for design (e.g. a given processor

architecture)

I. Tuomi. Internet, innovation, and open source: actors in the network. First Monday 6 (1), 2001.

© I. Tuomi 9.5. 2002 page: 43

The Final ChallengeThe Final Challenge• How to develop innovation policy when:

• Innovators almost always miss the actual dominant uses of newtechnologies

• When radical new technologies emerge they are always ill-defined,unclear, and worse than existing technologies

• The decisions on resource allocation heavily over-emphasizes the winnersof the previous generation

• ICT seems to accelerate regional change faster than we have realized• Policy development occurs in slower time-scales than technology

architectures evolve• National innovators can only operate successfully if they are parts of

global networks• Statistics are based on national accounting which gives an increasingly

misleading picture of innovation activity