Although industrial development began later in Finland than it did in many other European countries, by the 1950s manufacturing and processing had replaced agriculture and forestry as the leading sectors of the economy. By the late 1970s, the service sector had surpassed industry in total production and employmentÍÍÍÍ, but industry remained the main export earner, allowing the country to pay for needed imports of energy and raw materials. Labor efficiency was greater in industry than it was in the economy as a whole--the one-third of the work force employed in industry produced about 40 percent of GDP--and it continued to grow at a higher rate here than it did in other sectors. In turn, industrial wages tended to be higher and to rise faster than the national average, making industrial jobs attractive. Thus, although some observers categorized Finland as a postindustrial society, the Finns strove to maintain industrial competitiveness, which they saw as the foundation for their high standard of living. By the early 1980s, however, as a result of the oil crises of the 1970s and the increased competition in world markets for manufactured goods, Finnish industry faced serious challenges. Many observers argued that to maintain industrial exports, the Finns would have to shift from heavy industry to high-technology products.

The geographical distribution of industry had been strongly influenced by the relative shortage of raw materials (other than lumber) and by the small size of the domestic market. The woodprocessing industries had grown up on rivers near the coast of the Gulf of Bothnia and the Gulf of Finland, in locations that offered sources of both lumber and hydroelectric power as well as access to foreign markets. As many raw materials were imported and most industrial production was exported, other industries had grown up in the four southern provinces, especially near Finland's main harbors along the southern coast. Although the government had implemented policies that favored development in the north during the postwar period, in the late 1980s more than 70 percent of industrial jobs were still located in the south. In the long run, the development of high-technology industries, less dependent on transportation and energy supplies, might facilitate efforts to decentralize industry, but such development would be gradual.

Once dominated by the forest industries, Finnish industry underwent rapid structural change after World War II. A boom in metalworking began in the immediate postwar years in response to the need to ship capital goods, including machine tools, ships, rolling stock, and chemicals, to the Soviet Union (see The Effects of the War , ch. 1). By the mid-1950s, heavy industry had taken over the leading role traditionally held by wood products. Beginning in 1957, Finland began to liberalize its trade policies, forcing domestic industry to compete in world markets and bringing new industries to the fore, especially metalworking and engineering, but also petroleum refining, chemicals, plastics, and high-technology 100goods (s (see table 18, Appendix A).

Guided by domestic and foreign tastes and by fierce international competition, industrial firms had developed a wide range of products and had maintained quality standards that were often higher than those typical of industry in the United States. Aware of the relatively small size of their industry, industrial leaders and government officials aimed successfully for technological leadership in narrowly defined subsectors in which Finland enjoyed comparative advantages. Since the 1950s, Finnish firms have been able to dominate world markets for products such as icebreakers, wood-processing and paper-processing machinery, and environmental protection equipment. Buyers of such products were often less sensitive to price increases than they were to technical innovations, quality, and durability. At the same time, Finland had avoided some of the structural weaknesses, such as excessive investments in declining product lines, that plagued the other Nordic economies.

Finland's industrial structure traditionally was polarized between large and small firms. In the early 1980s, the vast majority of Finland's 15,000 industrial firms each employed fewer than 100 people. These small firms accounted for only about onefifth of the industrial work force and for slightly more than one-fifth of the value of industrial output. The approximately 130 firms that employed more than 500 people apiece commanded about 60 percent of the labor force and produced about two-thirds of industrial output. During the mid-1980s and the late 1980s, a wave of mergers further reduced the market share of small firms. Although industry was thus quite concentrated, the flexibility and innovativeness of small firms had often proven crucial, and observers believed that small firms would continue to serve important entrepreneurial functions.

Despite many notable successes, industry faced new difficulties in the 1970s and the 1980s, in addition to increases in world energy prices. By the late 1970s, industrial firms faced tougher foreign competition and had to scramble to maintain their shares of export markets. To ensure competitiveness, industry needed to renovate existing plants and to increase sharply investments in high-technology product lines that could supplement traditional specialties.

Industrial capital formation was a major priority. Although Finland's relatively recent industrial development meant that many industrial facilities were still relatively new and efficient, the drive to develop high-technology production required massive investments. Industrial firms carried a debt load that averaged about 80 percent of total assets, making further investment difficult. In the late 1980s, however, a number of developments promised to improve industrial financing. Helsinki's financial markets were becoming more innovative, and informed observers expected that the state would cut taxes on corporate profits, would eliminate taxes on industrial energy consumption, and would increase tax credits offered for research and development expenditures (see Banking and Finance , this ch.). Despite these positive developments, however, industry needed to attract more resources from abroad if it were to remain competitive in world markets.

Finland's industry had long depended on world markets, but until the 1980s direct foreign investment in Finland had played only a minor role. The country hosted significantly fewer foreign firms than its Nordic neighbors, partly as a result of limitations on foreign ownership of Finnish assets. Such regulations had been relaxed after 1980, but foreign firms still controlled only about 5 percent of industrial capacity. Finnish firms likewise began to invest abroad in the 1970s. Thus, whereas in 1970 only 5 Finnish firms had invested in the United States, by 1987 about 250 had done so. By the late 1980s, internationalization had begun to supplant the traditional strategy o 49d f specialization, as more and more firms entered joint ventures with foreign partners and built plants in countries to which they exported. The trend toward internationalization offered the prospect that Finland would be able to attract additional capital and up-to-date technologies.

Data as of December 1988