Local Innovative Activity and Regional Productivity: Implications for the Finnish National Innovation Policy

Finland as a whole would benefit from redesigning its policy combination in order to foster the reallocation of its resources to their most productive uses. In redesigning the policy combination due attention should be paid to creative accumulation and creative destruction. It is important that different policies clean up their acts following a sound division of labour. Innovation policy should celebrate firms that endeavour to move the current technology frontier forward no matter where they are actually located, even when they happen to locate in ‘advantaged’ regions. Innovation policy should also foster the diffusion of knowledge by helping inefficient firms adopt more efficient production methods. Product and labour market policies should be used to grease the wheels of creative destruction. In particular, competition policy should be used to promote the entry of new innovative players. It should also stimulate the reallocation of market shares from less to more efficient competitors. Regional imbalances should not be of any concern for innovation related policies, no matter whether promoting knowledge diffusion contributes to regional convergence or peddling creative destruction increases regional disparities. Any regional agenda may lead to slower productivity growth and cumulative losses in value added. Social equity should be targeted through traditional redistributive tools by targeting ‘disadvantaged individuals’ rather than ‘disadvantaged regions’.