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Business Finland funding and post-COVID-19 recovery growth

Teemu Makkonen, University of Eastern Finland

When the COVID-19 pandemic struck Finland, it became evident that there is an urgent need to support firms in Finland.  A significant sum of funding (990M Euro in 2020 compared to 570M in 2019) was allocated through Business Finland via its new “Funding for business development in disruptive circumstances” program in 2020.

Academic innovation literature supports this action: governments should act counter-cyclically. Rather than decreasing R&D funding they should increase it to help firms to innovate. This is because innovation – that is commonly heralded as the cornerstone of economic growth – is normally also seen as the way out of (economic) crisis. While an economic crisis is naturally a very different type of crisis from the contemporary COVID-19 caused one, these lessons learned, however, provide useful benchmarks when designating contemporary policy actions.

Despite the academic support for increased public R&D funding during a crisis, there has been some critical voices towards the allocation of the funding, especially whether the support was allocated to the “right” firms, that is, to those firms most heavily affected by the COVID-19 pandemic. Admittedly, the subsequently introduced business cost support schemes administered by the State Treasury are more suitable to tackle firms’ immediate cash flow problems (to financially support firm survival through the crisis). However, the purpose of Business Finland funding was to encourage firms to innovate their own solutions that help them to tackle the detrimental effects of the COVID-19 pandemic. To get a wider outlook on the likely impacts of Business Finland funding during the COVID-19 pandemic, one should also benchmark the capacity of the funding to affect economic growth.

As part of the COSPIN -project we ran estimation (forecast) models on the likely impacts of Business Finland funding on regional (recovery) growth. Forecasting is naturally a “tricky” business as we cannot see the future (the likelihood of new more dangerous variants of the disease nor when the COVID-19 pandemic will finally be over, etc.). However, all the estimation models we ran supported the view stated in the academic literature that Business Finland R&D funding has (and will have) a positive impact on the economic growth and post-COVID-19 recovery of Finnish counties (maakunnat). As such, (not taking a stance on the firm-level allocational issues), the Business Finland administered COVID-19 funding appears to have been a good policy tool for supporting economic development at the regional level in Finland. In other words, while short-term business cost support for firm survival is important when a crisis hits an economy, the situation changes if the crisis lingers as it can also lead to the misallocation of public funding towards supporting unviable firms. Therefore, surviving a crisis also requires governments to design policies that encourage innovation.

Read more about the estimation model and related results here: