Economy

Governments are increasingly utilising research and innovation (R&I) policy to foster economic and societal change. Yet, the empirical correlation between these policies and socio-technical transformations remains under-explored. The report investigates this relationship by comparing the Recovery and Resilience Plans (RRPs) of Austria, Finland and Sweden, initiated under the NextGenerationEU framework post Covid-19. The report finds significant disparities in the content, process and transformative value of the RRPs among these countries. The differences in the content of the national RRPs, and the ability and willingness to seize the opportunity presented by the RRPs to drive transformation, are explained by existing national policy contexts and frameworks. Surprisingly, the role of R&I policy in the RRPs is less important than expected, despite its emphasised importance in literature and political rhetoric. The report further identifies implications for a transformative innovation policy as well as areas for further research.

This report analyses the trends in Finnish productivity growth over the 2000s and 2010s. It describes its key features, makes comparisons to a benchmark of 16 OECD countries, and studies the causes of its sudden and prolonged slowdown which began at the end of the 2000s. The analysis focuses on the role of two contemporaneous demand shocks that hit the Finnish economy: the Nokia crisis and the Great Trade Collapse of 2009. Matching detailed firm-based information on structural characteristics of productivity growth with global input-output tables and National Accounts data, the report highlights how the prolonged drop in demand from the domestic computer and electronics sector may have induced a persistent drag on Finnish productivity growth. The report concludes with policy implications to strengthen Finnish resilience to idiosyncratic shocks to key sectors or large firms, while supporting long-term productivity growth and competitiveness.

In the context of the COVID-19 pandemic and resulting economic contraction and government debt build-up, the government is formulating reforms to raise employment by 80 thousand workers by 2029. Finland’s employment rate has been lagging behind the Scandinavian Nordics, with most of the gap attributable to older workers, who have more favourable access to early retirement schemes than their Scandinavian counterparts. To restrict their use, extended unemployment benefit, which is paid to unemployed persons aged 61 or more after normal unemployment benefit expires until they retire or reach 65, should be phased out and non-medical conditions should no longer be taken into account for disability benefit applications of persons aged 60 or more. Activity rates for mothers of young children are also lower in Finland than in the Scandinavian Nordics mainly owing to Finland’s generous homecare allowance. It should be reduced and access to convenient early childhood education and care services expanded to improve mothers’ work incentives. By increasing mothers’ work experience at critical points in their careers, such a reform would also help to narrow Finland’s large gender wage gap. As part of its 2021 budget, the government is setting out labour market reforms to increase employment by 31 to 36 thousand workers. Such reforms should focus on promoting employment of older workers.

The Impact of Regulation on International Investment in Finland examines what drives FDI into Finland and which domestic regulatory aspects may discourage foreign investment. The report analyses trends in FDI flows towards Finland and other Nordic-Baltic countries and discusses the benefits of foreign investment for the Finnish economy. It provides a comparative overview of the regulatory frameworks in force in Finland and its Nordic-Baltic peers, outlining both economy-wide and sector-specific findings, and explores how changes in these regulatory frameworks are linked to changes in FDI inflows in the region. Foreign investors’ views on Finland’s business environment complement these findings. The report underlines potential areas for reform and suggests policy actions that could further improve Finland’s investment climate and contribute to attracting and retaining more FDI, while also strengthening its positive impact.

The bulk of government investment is done at the local level in OECD countries, representing on average 41% of total public investment. Most studies on subnational government debt focus on the regional or state level, and very few studies analyse public investment specifically by local governments. This paper aims at filling this gap, presenting a framework to analyse the key factors, which affect the capacity of local governments to fund and finance public investment, and illustrates the framework with five case studies: Denmark, Finland, Ireland, Netherlands and New Zealand.

Among various barriers to increasing employment of older workers, this paper focuses on two notable ones that are relevant for the future of work. First, older workers engaged in codifiable, routine tasks are particularly prone to the risk of being displaced by computers and robots. Second, several countries have in place various labour market institutions that encourage early retirement, such as exceptional entitlements or looser criteria for unemployment and disability benefits applied to older individuals. This paper presents evidence that these two factors reinforce each other to push older workers out of employment. It is found that older workers who are more exposed to digital technologies are more likely to leave employment, and that this effect is significantly magnified when they are eligible to an extension of unemployment benefits until they start drawing old age pension. Furthermore, a simple simulation based on the empirical findings illustrates that a reform that tightens the eligibility for the benefit extension would increase mostly the employment of older workers that are more exposed to digital technologies.

The COVID-19 crisis has had a profound impact on SME access to finance. In particular, the sudden drop in revenues created acute liquidity shortages, threatening the survival of many viable businesses. The report documents an increase in demand for bank lending in the first half of 2020, and a steady supply of credit thanks to government interventions. On the other hand, other sources of finance declined, in particular early-stage equity. This paper, a special edition of Financing SMEs and Entrepreneurs, focuses on the impacts of COVID-19 on SME access to finance, along with government policy responses. It reveals that the pre-crisis financing environment was broadly favourable for SMEs and entrepreneurs, who benefited from low interest rates, loose credit standards and an increasingly diverse offer of financing instruments. It documents the unprecedented scope and scale of the policy responses undertaken by governments world-wide, and details their key characteristics, and outlines the principal issues and policy challenges for the next phases of the pandemic, such as the over-indebtedness of SMEs and the need to continue to foster a diverse range of financing instruments for SMEs.

The design of intergovernmental fiscal relations can help to ensure that tax and spending powers are assigned in a way to promote sustainable and inclusive economic growth. Decentralisation can enable sub-central governments to provide better public services for households and firms, while it can also make intergovernmental frameworks more complex, harming equity. The challenges of fiscal federalism are multi-faceted and involve difficult trade-offs. This synthesis paper consolidates much of the OECD’s work on fiscal federalism over the past 15 years, with a particular focus on OECD Economic Surveys. The paper identifies a range of good practices on the design of country policies and institutions related strengthening fiscal capacity delineating responsibilities across evels of government and improving intergovernmental co-ordination.