No major regional differences in firms’ profitability in Finland

Firms are more productive in concentrated areas, but competition is tougher and costs higher in larger cities.

Research by VATT reveals that the net result of these two divergent influences is that there are no major discernible regional differences in the profitability of Finnish firms. Productivity is an important macroeconomic indicator, but at the firm level success is determined by profitability. Firm-specific factors and sector are the main drivers of firm profitability.

There has been discussion as to whether Finnish regional policy should be centralizing or decentralizing. Prime Minister Juha Sipilä believes that with digitalization, Finland could even gain a competitive edge by decentralizing, whereas several economists have commented that productivity is increased by having firms concentrated geographically.

Various participants in this discussion have commented on somewhat differing topics. Economists have traditionally focused on studying productivity, or efficiency, whereas in business the success of firms is measured by many other indicators too. Principal among these are profitability, solvency and liquidity.

According to a recently published study in the journal Papers in Regional Science there are no major regional differences in firms’ profitability in Finland. The study was produced by Saara Tamminen, senior researcher at the VATT Institute for Economic Research.

Firm-specific factors and sector affect the profitability of individual firms most. There are also no major regional differences between the largest cities in Finland and less densely populated areas in the probability of firms exiting the market. However, according to the study firms’ productivity is above-average in urban areas.

Although the efficiency benefits of agglomeration and the selection of more productive firms in larger population centres may have a positive effect on firms’ profitability and survival, at the same time competition is tougher and costs significantly higher in larger cities.

The net result of these two opposing effects is that no major regional differences were observed in firms’ profitability even in the global demand shock of 2008–2010, which particularly affected exporting firms concentrated in the largest cities. According to the study, the profitability of Finnish exporting firms in 2009–2010 fell significantly more than the profitability of firms in the same sectors operating solely in the domestic market.

Based on the study, firms generally locate where it is profitable for them to operate. This study does not directly study regional firm aid, but nor are these justified in the light of these research findings. Public funds may be spent as regional aid to keep non-profitable firms going, and then the efficiency benefits of agglomeration will not be achieved.

“Based on the findings, both sides in the discussion referred to previously are partly right. Firms can succeed in different parts of Finland, but the best efficiency benefits are achieved when firms are geographically concentrated fairly close to each other”, Tamminen comments.

Further information:

Senior Researcher Saara Tamminen, +358 295 519 450

Further information on the publication from the researcher:

Tamminen (2016): Regional effects or none? Firms’ profitability during the Great Recession in Finland, Papers in Regional Science