Building the Future for Mid-size Companies in Finland


Building the Future for Mid-size Companies in Finland

Excluding fishermen, foresters, hunters and farmers, there are almost 270.000 companies in Finland. That is 1,5 companies per lake. That is 0,71 companies per square kilometer. 98,9% of all companies are small, 50 employees or under. There are only 600 companies which employ 250 people or more. Over half (53%) of the compound revenue of all companies (390 billion euros) is generated by SME companies and they comprise 40% of our GDP.

Compared to large economies like Germany, the proportion of small (50-250 employees) companies in Finland could triple to match that of mega-economies. There is a general consensus that the potential of future economic growth and innovation stems largely from this broad base of small enterprises. And also that the SME sector needs to be heavily supported to start a meaningfully positive trend.

The Confederation of Finnish Industries (EK, Elinkeinoelämän Keskusliitto) released a report in May 2014 based on a survey of almost 800 leaders – the results were somewhat depressing. The perceived atmosphere and attitudes towards entrepreneurship has eroded during the past couple of years. The exception being the start-up scene which is flooding with positive energy and with the supercells of our time, the image of Finland as a haven for start-ups and innovation has been polished. There is a strong aspirational drive towards international markets, largely because of high labor costs and steep taxation in the domestic market.

Another phenomenon which amplifies an increasingly throbbing SME head-ache is the trend in increasingly longer payment terms and its impact on cash-flow and an increasing need for external financing. The current average payment time is “only” 28 days, but the large businesses are imposing small businesses with payment terms of up to 60 days and prolonging payment milestones to the extreme. If the well-being of the SME sector were in the hands of corporate solidarity, the SME segment would be doomed.

EK sees that the internationalization of the Finnish SME sector needs to be supported to stimulate the growth of this sector. Only 28% of the nation’s exports stem from the SME, which means our export-dependent economy is dependent on our large companies making it somewhat vulnerable. In addition, businesses’ culture and attitudes towards growth related risk-taking should change – higher returns typically come from higher risk-taking.

The technology industry is the strongest of our industry segments with regards to exports (55%) and R&D investments (80%). The Federation of Finnish Technology Industries has a mission to ensure the Finnish technology industry has the required preconditions to succeed in the global marketplace. The Federation harbors various initiatives and works with the primary organizations which support innovation and internationalization as well as organizations such as Finnvera, Tekes, Sitra, Finpro, ministries and many other associations and lobbyists.

The Ministry of Labor and Economy commissioned the ICT2015 Working Group to issue a new strategy to address the abrupt structural changes ICT was facing, to rethink the domestic ICT industry and to re-ignite growth. The findings were titled as “21 Paths To A Frictionless Finland”, grouped into for different categories of capabilities: Infrastructure, Skills, Finance and Operating Methods. I found the report quite stimulating and the findings were largely pragmatic and seemingly executable, but somehow my mood remains unchanged – in a perfect world, yes this is exactly what we should do! The proceedings of the “21 Paths” can be monitored on the ICT2015 website, each path itemized separately with a process rating and details on what has been accomplished.

Looking at the roster of members in the ICT2015 Working Group, I wonder who was truly representing the 98,9% of Finnish businesses i.e. those businesses which are supposedly the fuel- for-our-future-growth? In fact, none of them directly, a few of them through association at best.

There seems to be quite a strong consensus on what needs to be done to support the SME businesses, to fuel growth, to ignite innovation and to endorse a true internationalization agenda. The same consensus also agrees that governmental policy and decision-making is the single largest change agent in making things develop in the right direction.

As a leader of a mid-size company and operating in the ICT industry, what would I consider as an appropriate recipe for us? I would cluster them into a couple of disciplines: financial instruments, marketing and promotional instruments and networking and collaboration instruments.

Financial instruments need to be finely tuned. Given that 98,9 % of our economy’s companies are categorized as SME and they generate over half of the compound revenue, I can understand the caution of implementing e.g. broad scale tax relief or other instruments which potentially impact fiscal KPIs. Targeted measures however, could also have immediate positive effect as small companies have more straight-forward decision making protocols and thus they react with more agility than larger organizations. One would think the hefty advantage the state gets from having a citizen employed (and paying taxes) would be tempting enough to release some incentives to the employers – instead of having one more on the street living off unemployment allowance. Channeling back some of this advantage to the employer would surely result in lowering the employment threshold.

On more positive note, there are a couple of measures available for tax relief in the form on R&D expense deduction (as tax-relief) as well as relief from education expenses. The former, though, has an expiration date and has ambiguous guidelines.

Practically all SME’s are privately held and I doubt many shareholders and owners would try to benefit from immediate prize but rather channel relief measures on more long-term actualizations and investments. Currently available R&D related instruments are not very effective and do not encourage many companies to apply for them.

In most articles I read about SME companies’ growth ambitions, globe-trotting ranks pretty high up. Internationalization is notoriously expensive and many businesses have ended belly-up as a result of fruitless crusades to the unknown. Entering a new market for a formerly unknown SME company is the start of high-velocity marketing and sales promotion activities, which are high in cost and often slow in return. When cash-flow is everything, it can be a while before the newcomer sees any flow in its accounts. There are organizations which promote Finnish companies in foreign markets – but at a cost, which even after cost relief measures can prove to be quite an investment.

Among the 269.400 companies (the SME sector) there are surely clusters of companies which could be identified who have very limited competitive overlap but similarities in terms of geographical aspirations, high-level industry similarities and other compatibilities for joining efforts in international expansion or other development agenda. But navigating the interconnected support schemes, understanding application procedures, identifying emerging initiatives, building networks to different organizations requires expertize. Clustering demand and interests could help share the burden of seeking schemes and initiatives with common denominators.

Building the future for SME companies is not an easy exercise. When support measures and initiatives are arbitrary, they seem to come and go, the guidelines are sometimes enigmatic and often with very limited impact, it is virtually impossible to implement them into any long-term planning. It is unreliable to base any business-cases on relief instruments and at best, they are included in long-term investment calculations as the unknown variable.

Well, now it is time to switch off for a while. I will bury all thoughts of the future of SME’s into the sands of my summer vacation. Looking at the amount of discussion bubbling around this subject, I am confident things will evolve in the right direction.

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Blog writer

Mika Tanner

Bilot Alumni