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Value chains are internationalising – less remaining in hand from exports

Government Communications Department
Publication date 30.11.2016 11.48 | Published in English on 30.11.2016 at 12.11
Press release 516/2016

Internationalisation of value chains in the production of goods and services has significantly affected the structure of Finland’s foreign trade as well as conditions for export-led growth. The ability of exports to generate economic growth in Finland has weakened. At the same time, Finland has become more dependent on, among other things, the economic development of China. These are the findings of a study Finland in global value chains, prepared by the Research Institute of the Finnish Economy and the Secretariat of the Economic Council, which was published on 30 November.

The study examines the impact of the internationalisation of value chains on a macroeconomic level, utilising a new type of international input-output data. The data help to provide new information on the export and import of various intermediate products and on domestic and foreign value added within trade flows.

An exceptionally high proportion of Finnish exports consists of various intermediate products, which is indicative in principle of a strong connection with international value chains. It has traditionally been the case in Finland, however, that the structure of exports has been weighted towards semi-finished products, and this proportion has not grown particularly quickly.

Use of foreign intermediate products may improve the competitiveness of Finnish companies, but this has also led to a decline in the domestic content of exports. As a result, the ability of exports to generate economic growth in Finland has declined on average: whereas in 1995 one export euro increased GDP by 73 cents, the corresponding figure in 2011 was only 62 cents. The proportion of domestic value added varies strongly from one sector to another. It has, however, declined in all sectors of industry.

The data used in the study facilitate a non-traditional way of examining the macroeconomic significance of foreign trade and the interdependencies of trading partners. When ‘exports of value added’, i.e. the influence of foreign final demand on Finland’s GDP, is used as an indicator, China has risen to become Finland’s most important single trading partner during the period under examination. The significance of the United States is also greater than conventional gross export figures would suggest.

The study does not directly take a position on whether value chaining has been desirable for Finland. The slowdown in economic growth after the financial crisis coincides, however, with the reduction of the contribution of foreign demand perceptible from the data. Earlier research, such as that carried out by the OECD, among others, shows that participation in value chains has the effect of promoting productivity, innovations and economic growth. Internationalisation of businesses may be supported by removing various barriers to trade and by developing the basic infrastructure and services required by foreign trade. In the longer term, there will be a growing emphasis on domestic market competition policy as well as investment in education, research and product development.

Finland in global value chains

Inquiries: Pekka Sinko, Secretary General of the Economic Council, Prime Minister’s Office, [email protected], tel. +358 295 160 189, and Jyrki Ali-Yrkkö, Deputy CEO, Etlatieto Oy, [email protected], tel. +358 46 8510 501