The Determinants of Finnish Export Structure, 1956–1989

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Title: The Determinants of Finnish Export Structure, 1956–1989
Author: Lavikainen, Kasperi
Contributor: University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies
Publisher: Helsingin yliopisto
Date: 2018
Thesis level: master's thesis
Abstract: The industrial structure of Finnish exports was dominated by wood-processing industries since the first globalization period. Yet after the Second World War and hastened by the liberalization of foreign trade, new exports of metal, chemical and textile industries emerged and the traditional forest industries raised their level of refinement. While previous historical research has recognized these tremendous changes, there is no comprehensive study attempting to explain what determined this development in export structure. The handful of previous studies that refer to possible factors do so with lacking empirics and particularly without utilizing econometric methods. The econometric method used in thesis is fixed effects regression, besides which quantitative tables and graphs are used as well. The input-output tables of Finland calculated by Statistics Finland and covering 1956–1989 were the main source of data. The input-output tables also provide a technique for obtaining figures regarding both direct and indirect use of different factors. While direct use accounts for the use of a factor by the industry itself, indirect use also reflects how the industry’s input providers use that factor. This technique was also used to calculate domestic value-added of exports, which is a key novelty of this thesis. Gross exports remain the standard measure of historical trade studies even if they include the value of imported inputs, the share of which increased over the post-war period. Domestic value-added of exports removes this bias. Previous historical research has also had a loose theoretical underpinning where it is not made explicitly clear on what grounds mentioned determinants of trade are given weight. It was judged not only important for this thesis’ empirical approach to adhere to an economic trade model but also to assess which one was the most valid in the Finnish post-war context. The model chosen was the Chamberlin-Heckscher-Ohlin model where factor intensities – labour, physical and human capital and natural resources – are complemented by horizontal differentiation and scale advantage. It was also deemed important to consider several institutional characteristics of that time: export cartels, state-owned companies, customs barriers and Eastern Trade. Each export industry had its own determinants. Forest industries used domestic natural resources to a great, but decreasing, extent with capital, cartels and state-owned companies being other features. While basic metal industry was similar to paper industry in many respects such as in its capital intensity and scale advantage, metal engineering industries tended to be more characterized by R&D, product differentiation and Eastern Trade. Chemical exports were also determined by many different factors, such as skill intensity and R&D whereas the labour intensive consumption goods exports were initially dependent on customs barriers. After free trade integration reduced tariff rates these industries shifted their focus to Eastern Trade which was in its own way a form of protectionism too. Service exports tended to be capital intensive, or skill intensive in a few cases, whereas exports of the primary sector used labour, resources and also capital to a great extent. The econometric results suggest that the export structure of 1956–1970 was driven by capital intensity specifically related to the use of machinery and transport equipment and by the declining use of natural resources. This is not only reflective of increasing level of refinement in wood and paper exports, but also by the emergence of new export industries. Factor intensities are less explanatory in the 1980s where the evidence suggests that scale advantage may have become an important determinant of exports. Surprisingly, Finnish exports were characteristically homogenous and not horizontally differentiated in the late post-war period. A closer inspection revealed that this was specifically a feature of exports to Western markets, which were also slightly characterized by technological differentiation. Horizontal differentiation was a feature of Eastern Trade which supports the argument that it functioned as a springboard for raising the technological level of Finnish exports. However, econometric results also support the notion that labour intensive industries used it as an extension of customs barriers. While several determinants of export structure are identified in this thesis, so were many venues for future research such as an international perspective. While there were indications that skill intensity and know-how were important in Finland it seems that this was on a lower scale than in other European countries. Although Finland shared some of its features with other Nordic countries, its exports were less diversified than in Denmark, or Sweden where metal industries developed earlier. Particularly the importance of Eastern Trade in Finland also indicates that demand-side theories might be applicable in the Finnish post-war export structure besides the supply-side approach used in this thesis.
Subject: Foreign Trade
Value-added of Exports
Export Structure
Post-War Period
Heckscher-Ohlin Model
New Trade Theory
Chamberlin-Heckscher-Ohlin Model
Forest Industries
Forest Exports
New Exports
Natural Resources
Human Capital
Scale Advantage
Product Differentiation
Eastern Trade
Customs Barriers
State-owned Companies
Discipline: Talous- ja sosiaalihistoria
Economic and Social History
Ekonomisk och social historia

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