DBJ Research Center on Global Warming
Discussion Paper Series No. 59 (4/2016)

The Mechanism of High-tech Industrial Cluster Formation:
An Empirical Study on the Process of ICT Cluster Formationin Oulu, Finland

Takashi Sasano

The aim of this discussion paper series is to stimulate discussion andcomment from academics and policymakers through a preliminary draft
form. This paper is included by permission of the author(s) as a tentative
material before publication in peer-reviewed journals or books. Copyrightand all related rights are maintained by the author(s). Views expressed inthis paper are those of the author(s) and do not reflect the views of the
Research Institute of Capital Formation or Development Bank of Japan.

DBJ Research Center on Global Warming

Discussion Paper Series No. 59 (4/2016)

The Mechanism of High-tech Industrial Cluster Formation:
An Empirical Study on the Process of ICT Cluster Formation in Oulu, Finland1 2

Takashi SASANO
Research Institute of Capital Formation
Development Bank of Japan

1 This paper is an English translation of most of the original paper, which was written in Japanese andoriginally appeared in Economics Today, Vol. 27, No. 2, October, 2006, published by the ResearchInstitute of Capital Formation, Development Bank of Japan. I deeply thank Ms. Beverly D. Hasegawa,International Strategy and Coordination Department, Development Bank of Japan Inc., for her carefultranslation.
2 I thank Prof. Takeo Kikkawa (Tokyo University), Prof. Shigeru Matsushima (Hosei University), Prof.
Akio Nishizawa (Tohoku University) and participants in the seminars respectively held by Prof.
Kikkawa, Prof. Matsushima and the Research Institute of Capital Formation for their helpfulcomments and suggestions. I am also indebted to Prof. Yuko Harayama (Tohoku University) for his
many motivating suggestions given at the Regional Cluster Seminars in Sendai and Tokyo. I also
thank key persons related to the Oulu ICT cluster who kindly allowed me to conduct interviews, andespecially thank Mr. Seppo Mäki, former Manager, Business Relations, City of Oulu for his extensive
help and kind suggestions.

II

CONTENTS
Introduction･･････････････････････････････････････････････････････････････ ·1
Chapter 1

Differentiating the Concepts of Industrial Agglomeration andIndustrial Clustering･･･････････････････････････････････････････ ·4

Chapter 2

A Review of Research Findings on the Economic Mechanisms
At Work within Industrial Agglomerations and Industrial Clusters･･ ·9

Chapter 3

Constructing a Working Hypothesis for the Formative Mechanismof High-tech Industrial Clusters･･･････････････････････････････････････････ 17
3.1 Sustaining Mechanisms of Industrial Agglomerations･･････････････････････ 17
3.2 Summarizing the Breakdown Mechanisms of Industrial Agglomerations･････ 21
3.3 The Formative Mechanisms of High-tech Industrial Clusters････････････････ 22
3.3.1 Innovation and Its Relationship to Industrial Agglomerations･････････････ 24
3.3.2 Sustaining Mechanisms of High-tech Industrial Agglomerations･･･････････ 29
3.3.3 Working Hypothesis for the Formative Mechanisms of High-tech
Industrial Clusters･････････････････････････････････････････････････････････ 30
3.4 Verifying the Working Hypothesis: Selection of a Region for Analysis････････ 39
Chapter 4

Development of the Oulu ICT Cluster and Verification of

the Working Hypothesis･････････････････････････････････････････････････ 41
4.1 Oulu Before Development･････････････････････････････････････････････ 41
4.2 Summary of the Development of Oulu and the Oulu Region････････････････ 45
4.3 Moves Taken by Local Actors in the Forming of the Oulu ICT Cluster,by Decade･･･････････････････････････････････････････････････････････････ 60
4.3.1 Principal Initiatives from 1958 through the 1970s･････････････････････････ 60
4.3.2 Principal Initiatives in the 1980s･･･････････････････････････････････････ 86
4.3.3 Principal Initiatives in the 1990s･･････････････････････････････････････ 102
4.3.4 Principal Initiatives in the 2000s･･････････････････････････････････････ 107
4.4 Verification of the Working Hypothesis･････････････････････････････････ 111
III

4.4.1 Verification of the Five Formative Processes････････････････････････････ 111
4.4.2 Verification of Mutually Enhancing Causal Correlations among
the Formative Processes･･････････････････････････････････････････････････ 134
4.4.3 Verifying the Boundary between the Foundation Period and theDevelopment Period･････････････････････････････････････････････････････ 144
4.5. Principal Actors in Activity Groups Involved in the Formative Processof the Oulu ICT Cluster･･･････････････････････････････････････････････････ 145
4.6 Summary･･･････････････････････････････････････････････････････････ 149
Chapter 5Conclusions･････････････････････････････････････････････････ 152

Appendix

Implications of IT Cluster Formation for Regions in Japan････････ 155

Afterword･･･････････････････････････････････････････････････････････････ 165
Bibliography･･････････････････････････････････････････････････････････････ 166

IVIntroduction

The concept of the industrial cluster is a familiar one to regional development workers,
policy formulators for industry, science and technology, and researchers in these fields
throughout the world.3 In Japan, the central government implements cluster policies4
developed since the beginning of this century by the Ministry of Economy andIndustry (METI) and the Ministry of Education, Culture, Sports, Science andTechnology (MEXT). Regional governments may use central government measures toaugment policies they already have in place; those with no measures of their own may
use the government’s as starting points for new initiatives.
The development of an industrial cluster takes time. This may be one reason why
Japanese communities planning to create a cluster tend to wait for the results ofexisting initiatives to come in before exploring future strategies.5 Similar approaches
are taken throughout much of Europe, North America and Asia. Even regions whereclusters are up and working make ongoing efforts to ensure that they produce stable orbetter results.
As an idea, the industrial cluster has drawn steady interest from a wide range of
people across the world and from regional development specialists in particular. This isbecause it is seen as a valuable methodology for producing stable growth andemployment in regional economies, one which helps a region’s leading industries tomaintain and strengthen their competitiveness while creating new local firms andsectors. For individual companies, the concept can have important relevance for site
location and innovation strategies. Companies with global operations, especially inknowledge-intensive or science-based fields, find numerous advantages in locating in
an industrial cluster: not only do they enjoy superior access to materials andcomponents, but they also have a better chance to differentiate their goods and services

Michael E. Porter, in The Comparative Advantage of Nations (1990), points out that the morecompetitive of a country’s industries tend locate in clusters. He uses the term frequently
throughout the book.
4 METI initiated an industrial cluster project in FY2001. MEXT began an intellectual cluster
development project in FY2002.
5 Some regions, such as Kyoto and Hamamatsu, are regarded as home to developed industrial
clusters. Even here, however, efforts are ongoing to support the creation of new businesses andindustries.
3

1

from those of other firms. Clusters provide a favorable environment for innovation,
which is a difficult factor to overestimate. Entrepreneurs, meanwhile, benefit greatly
from starting up in a region supportive of their needs. It would hardly be surprising tofind that regions which are supportive turn out disproportionate numbers ofentrepreneurs.
Research on industrial clusters took off in earnest in the 1990s, when both national andlocal government policymakers showed increasing interest in the subject. From thestart, there has been some confusion as to what, exactly, is meant by the term
‚industrial cluster,‛ and proponents tend to differ in their definitions. Some, moreover,refer simply to ‚clusters,‛ others to ‚industrial clusters‛ or ‚regional clusters.‛6 Stillothers, emphasizing the role of clusters in fostering venture business, use the term
‚innovation clusters.‛7 In a similar vein are the ‚industrial district‛ and ‚innovative
milieu‛ concepts. 8 ‚Regional innovation systems‛ 9 also have many features incommon with industrial clusters. Terms and definitions may vary, but all of theseconcepts are closely connected with how regional development strategy, national andregional science and technology policy, and innovation policy are designed.
‚Industrial cluster‛ is the term I use in this paper. It refers to a type of regional
industrial strategy aimed at achieving sustainable development of the local economy,or, more specifically, ensuring stable employment and maintaining or increasing local
exports. Thus I stress the word ‚industrial‛ in ‚industrial cluster.‛
Suitable businesses for an industrial cluster are by no means limited to those inhigh-tech or even the manufacturing industry. Local measures to promote the tourism
industry may result in ‚tourism clusters,‛ for example. Of the many types of industrial
METI and MEXT use the term ‚regional cluster‛ in linking the Industrial Cluster Plan with
the Intellectual Cluster Creation Project (MEXT Science and Technology Research Center
Research Group No. 3 (2004), p. 4).
7 Nishizawa (2005), p. 31.
8 The former concept is described in Piore and Sabel, The Second Industrial Divide (1984), as aregional industrial community characterized by flexible division of labor, as opposed to a shiftof production to a country where the mass-production method is relatively underdeveloped.
The latter expression focuses on the community’s cultural and institutional environment: an‚innovative milieu‛ policy aims at creating a local culture that is amenable to innovation(Matsubara (1999), pp. 92-93).
9 Regarded as a counterpart for a national innovation system. Deriving from a perspective that
focused on the concept’s limitations, the term is also a product of modern regional economic
theory and regional industrial policy theory (Mitsui (2005), p. 215).
62

cluster, I have chosen to examine the high-tech variety and particularly themechanisms by which it is formed. This is a subject of great interest to regions that may
not possess the full range of resources of a major urban center, but may be home torespected research universities or existing industrial clusters in need of technologicalupgrading. Some regions with top-notch research facilities have tried to draw inheadquarters of high-tech firms, but were unable to attract them in sufficient numbers
to form a cluster. In the end they lost a good proportion of their graduates to otherregions. For almost a decade, several such communities have been working hard to
remedy this situation, and now, with improved physical and institutional
infrastructure, are beginning to reap solid results. But since clustering begets further
clustering, communities will need to take stronger measures in order to benefit fromthe true lock-in effect10 that is an industrial cluster’s primary characteristic. This brings
us to an important motivation for undertaking this study: The formation of high-techclusters is an important issue, and not only for individual regions. Progress in this area
will affect how Japan as a nation maintains its industrial competitiveness and promotes
regional self-reliance. The two types of high-tech clusters considered most typical are
IT (or ICT) clusters and bioclusters. I focus on the former in examining the mechanismof cluster formation for this report.
Chapter 1 differentiates the concepts of ‚industrial agglomeration‛ and ‚industrial
cluster‛ and defines what is meant by an industrial cluster in this report. Chapter 2
reviews the findings of existing studies of industrial agglomeration and industrial
clustering. Chapter 3 addresses the question of why industrial agglomeration
continues, as examined in prior studies on industrial agglomeration, as a starting point
for constructing a working hypothesis for the mechanism of high-tech cluster
formation. Chapter 4 examines this hypothesis in light of the formative process of the
ICT cluster in Oulu, Finland. Finally, Chapter 5 discusses the conclusions reachedthrough this analysis and considers future issues. In the Appendix I examine whatthese findings may mean to regions in Japan hoping to create high-tech industrial
clusters of their own.

10

Fujita and Hisatake（1999）

3

Chapter 1

Differentiating the Concepts of Industrial Agglomeration andIndustrial Clustering

In this chapter I compare the concepts of industrial agglomeration and industrial
clustering, and describe what is meant by ‚industrial cluster‛ in this paper.
A simple explanation of the industrial agglomeration is a useful place to start. 11
Economic geographers and business historians have made numerous studies of centers
in Japan for the production of such traditional products as textiles, and also of theclusters of small and medium-sized manufacturing firms that have formed in the larger
cities. Much of this research actually deals with industrial agglomeration, as it
examines the economic mechanisms at work when numerous companies (often SMEs)
in a given industry concentrate in a particular area.12
In the definitive book on modern industrial agglomeration, The Essence of Industrial
Agglomeration, by Hiroyuki Itami, Shigeru Matsushima, and Takeo Kikkawa, Itami(1998) defines an industrial agglomeration as ‚a concentration within a relatively small
region of numerous, deeply connected firms.‛13 As I will make clear, the fact thatcompanies are the only actors is one point that distinguishes industrial agglomerations
from industrial clusters. Explicitly excluded from agglomerations are universities,
public research centers and other knowledge-creating institutions, as well as tradeorganizations and other groups that promote partnership.

Hashimoto (1997) classified industrial agglomerations in Japan into a total of four categories:
two which developed around large-scale firms and two which developed around small andmedium-scale firms. Category 1 agglomerations are ‚company towns‛ such as Niihama or
Mizushima, which are dependent on large corporations with integrated production systems.
Category 2 agglomerations are also company towns, but complement large-scale processing
and assembly companies in, for example, the automobile and electrical industries. Toyota and
Hitachi exemplify this type. Category 3 agglomerations develop around production areas, andinclude Sabae, Tsubame and Tokoname. Category 4 agglomerations consist of networks of firms,
typically in machinery and metals processing, that develop in large cities. Examples are Ota-ku
in Tokyo and the city of Higashi Osaka. The form in which labor is divided among firms in an
agglomeration is clearly the major consideration in this method of categorization.
12 Kikkawa, Takeo, et al. Shijo torihiki o koeru keizai gorisei [Economic rationalization exceeding
market forces] (2001): p.102.
13 Ibid., p.2.
114

To describe industrial clusters14, we might look to the definition given by Michael E.
Porter in 1990 in The Competitive Advantage of Nations and repeated in his 1998 work On
Competition. Porter defines clusters as ‚geographic concentrations of interconnectedcompanies, specialized suppliers, service providers, firms in related industries, andassociated institutions (for example, universities, standards agencies, and tradeassociations) in particular fields that compete but also cooperate.‛15 This definition
thus differs from Itami’s in several respects, the most important being that Porter
explicitly includes related organizations, such as universities and standards
associations, in his definition, and that he makes reference to the actors’ behavior
towards one another, namely their competition and cooperation. Since Porter uses thepresence of universities as an example, it would be easy to infer that business-academic
partnership is a requirement for an industrial cluster, or that clusters are by definition
composed of high-tech companies. Porter, however, believes differently:
Some clusters center on research universities, while others draw little on the
resources of formal technological institutions. Clusters occur both in high techand traditional industries, in manufacturing as well as in service industries.
Indeed, clusters often mix high tech, low tech, manufacturing, and services.
(Porter, On Competition, p.207)
METI, which has had an industrial cluster project in progress since 2001, defines acluster as ‚an industrial agglomeration consistently producing new businesses which
are not only world-class but also serve to support the local economy.‛16 Here, METI
expresses the policy objective of creating new business, while, with ‚world-class new
businesses,‛ it emphasizes the transfer, or export, of products or technologies to otherregions or overseas. One important element of Porter’s conception is that a cluster be
outward-looking.17 In this sense his idea fits neatly within METI’s definition.
Porter himself uses the term ‚cluster.‛ He does not say ‚industrial cluster,‛ but prefaces theword ‚cluster‛ with the name of a place or product: e.g., Italian, shoe, fashion, or California
wine cluster; Massachusetts cluster, forestry products cluster, and so on (Porter, 1998),
pp.199-206. Any of these can reasonably be considered as an industrial cluster.
15 Porter, Michael. On Competition. Harvard Business Review Press (1998): pp.197-198.
16 The METI website (e.g. http://www.meti.go.jp/policy/local_economy/main_02.html). In
presentation materials of the Economic and Industrial Policy Bureau and elsewhere, METI gives
Porter’s definition in addition to this one, apparently adding to Porter’s definition to emphasize
policy objectives.
17 ‚The outward-oriented clusters based in a geographic area constitute the area’s primarylong-run source of economic growth and prosperity.‛ (Porter, On Competition, p.228.)14

5

In this paper, I attempt to explore the mechanism by which industrial clusters areformed. ‚Activity groups‛ play a vital role in cluster formation. I give them special
attention and seek to incorporate them into the definition of an industrial cluster.18 For
our purposes here, an ‚activity group‛ may be taken to mean a flexible group,composed of local individuals or organizations, which works steadily for the creation,
continuation or development of an industrial cluster. Such flexible groups exist to one
degree or another in any place regarded as an industrial cluster. I emphasize their
existence, therefore, and seek a place for them within the definition.
Building on Porter’s definition, I describe ‚industrial cluster‛ as ‚a value chain, and asocial system supporting it, existing in a coherent geographical area against a backdrop
of initiatives carried out by loose-knit, flexible activity groups composed of local actors
and aimed at the agglomeration of related companies and the generation of value in agiven field.‛ Porter, in defining clusters as ‚geographic concentrations ofinterconnected companies … and associated institutions (for example, universities,
standards agencies, and trade associations) in particular fields that compete but also
cooperate,‛ does not make an issue of the intentions or promotional efforts of local
actors; as long as the situation described in the definition exists, the presence of activity
groups is irrelevant. If we go by Porter’s definition, a conurbation like Tokyo iscomposed of diverse industrial clusters. While this is significant in itself, more
important for Japan’s future is how regions which, like Tokyo, do not possess a fullrange of necessary resources, can promote sustained development while making themost of the resources (like top-rate research universities) which they do have19, and, by
One way in which industrial clusters are held to differ from industrial agglomerations is thatthe former involve the participation of related entities, such as universities, standards
associations and trade groups, and the cooperation of related firms and organizations. These
local actors must, to some extent, have the development of local industries – or the formationand continuation of the industrial cluster – as a common objective. This is especially true whenlocal universities are included in these related groups. Since universities are driven by very
different imperatives than private companies, the two must have a sense of common purpose
above and beyond their normal mission if they are to work as close partners within a cluster. In
this paper, groups with a relatively strong sense of common purpose are called ‚activity groups‛
and are described in the definition of industrial cluster.
19 From the perspective of regional economic promotion, Matsushima (2005) proposed theconcept of the ‚hardiness of regional economies,‛ which differs somewhat from the idea ofsustainable development. In Matsushima’s view, a hardy region experiences no sudden or
large-scale decline in area-wide employment over the long-term, even while exposed to all sorts
of adversity. Even if a decline occurs, employment quickly recovers to a level near the original.
18

6

extension, whether such regions will recognize the value of industrial clusters inpursuing that goal. Activity groups would seem to be a prerequisite for the formationof an industrial cluster in areas like these. I make the presence of activity groups a partof my definition on the basis of this view, and also because people known collectively
as ‚activity groups‛ exist to one extent or another in the places we regard as industrial
clusters. I describe these activity groups as ‚loose‛ because local actors clearly differ intheir degree of participation, and as ‚flexible‛ because changes in a cluster’s
environment will inevitably affect the behavior of related activity groups. Interestingly,
many of the processes in the development of Silicon Valley – the original industrial
cluster, in Porter’s sense – are thought to have occurred naturally, regardless of theirinitial catalyst 20 ; ‚activity group‛ might be an inappropriate term under thecircumstances. But it seems clear that underlying the motivations of the entrepreneurs,
academics and others involved in the formation and development of Silicon Valley wasan anti-East Coast competitive urge, as well as a latent desire to create a new businessparadigm.21 Silicon Valley has seen little growth since the late 1980s. Joint Venture:
Silicon Valley Network (JV:SVN) took off in 1992 as a spontaneous attempt tocounteract the loss of both firms and people; its efforts to revitalize the area are wellknown. Initiatives like these suggest that Silicon Valley as a whole can be viewed as a‚loose activity group whose members have certain objectives in common.‛ And while
Silicon Valley may be an exception, any number of areas have used it as a model for
research as they labored to form high-tech industrial clusters of their own. While they
may vary in the extent of their undertakings, there is no question that activity groupsof some form have existed, and have put enormous effort into the formation ofindustrial clusters, in each of these regions.

He analyzes Tōmō, in Gunma Prefecture, as an example of a hardy region.
20 It is well known that Frederick Terman, who harbored a sense of rivalry towards the East
Coast, worked tirelessly to get Stanford graduates to remain in the West. Thanks to his efforts,
former students Bill Hewlett and Dave Packard stayed in Palo Alto, where in 1939, working out
of a small garage, they created the company that was to grow into the global giant bearing theirnames. Terman was also in part responsible for the establishment in 1951 of the Stanford
Research Park on the grounds of the university. In 1955, he induced the world-renowned
semiconductor researcher William Shockley to open the Shockley Semiconductor Laboratory in
the area; in 1957, eight researchers left Shockley to set up Fairchild Semiconductors. The
numerous spinoffs which followed included Intel in 1968.
21 This kind of nuance can be found throughout AnnaLee Saxenian (1994), for example on pages
p.p.63-76 of the Japanese translation.

7

In the following I use the term ‚industrial agglomeration‛ in Itami’s sense: ‚aconcentration within a relatively small region of numerous, deeply connected firms,‛
and ‚industrial cluster‛ as defined above.

8

Chapter 2

A Review of Research Findings on the Economic Mechanisms At Work

within Industrial Agglomerations and Industrial Clusters

In this chapter I review the findings of research to date on the economic mechanisms
found in industrial agglomerations and industrial clusters.22 Since innovation is one of
the more important aspects from which I consider high-tech cluster formation
mechanisms in Chapter 3, I look first at how the relationship between industrial
agglomerations (or industrial clusters) and innovation is treated in existing research.

Most research on the economic effects of industrial agglomerations starts with Alfred
Marshall(1920)’s analysis of ‚localized industries‛. Marshall made the analysis to help
explain the subject of external economics, and it deserves discussion here.
Marshall said that ‚localized industries,‛ or ‚agglomerations of specific industries in
specific regions,‛ form for a variety of reasons – natural conditions, royal sponsorship,
or a ruler’s forced relocation of artisans, for example – and that once formed, they tend
to be maintained.
In Marshall’s view, some examples of the advantages of industrial agglomerations arethat they:① Perform traditional functions, such as enabling ‚success secrets‛ to spreadfrom firm to firm, which indicate how technology accumulates orproliferates within a region.
② Promote the growth of subsidiary industries by, for example, supplying
tools and raw materials, systemizing distribution, and putting expensive
machinery to economical use.
③ Create regional markets for localized industries, to the benefit of users
and specialist workers alike.
The first of these advantages is usually defined as ‚technology and information
spillover,‛ but it actually is more than that. We can also find room for ‚innovation‛
within the definition. To paraphrase Marshall, when one person comes out with a new
A detailed discussion of Itami’s ‚Ongoing Mechanisms in Industrial Agglomerations‛ in
Itami(1998) is given in Chapter 3.
22

9idea, others pick it up and add their own inventions, thus producing the basis foranother new idea. This behavior is not mere imitation, but what Schumpeter (1926)
called ‚carrying out new combinations‛23 – innovation, in other words. Marshall, too,
noticed the innovation-promoting effect of industrial agglomerations.
By creating new regional markets for localized industries (the third advantage),industrial agglomerations make it easier for workers to change jobs. Marshall says thatlabor-management relations in agglomerations are generally good, but the occasional
unpleasant situation cannot be allowed to degenerate into repeated friction. When along-standing relationship goes sour, both parties benefit if it can easily be nullified.
Yamamoto (2000) says that these conditions ‚create the basis for the active diffusion ofknowledge and technology.‛24 In this respect, they also promote innovation. Thus,
while he may not articulate it explicitly, Marshall does include the promotion of
innovation among industrial agglomeration’s advantages.

Of the various forms of economics of agglomeration, Marshall seems to have explainedthe ‚economics of specification.‛ It is urban economists, on the other hand, who
explain the ‚economics of urbanization.‛ Henderson et al (1995) use city-specific andindustry-specific data for the United States to show that rising industries, such as
computers, electronic devices, and medical equipment, grow faster in conditions ofurban diversification (Jacobs’s externality) and industrial specialization within a region(Marshall, Arrow, and Romer’s externality), and that mature industries, such as metals,
general machinery, electrical machinery, transportation machinery, and precision
machinery, maintain high growth rates under conditions of intra-region specification(Marshall, Arrow, and Romer’s externality). These findings confirm the ‚economics ofSchumpeter (1926) gave five examples of new combinations: ① The production of a new
good, meaning one not yet known among consumers, or a good with new quality. ② The
introduction of a new production method, meaning one which is, for all practical purposes,
unknown in the industrial sector in question. This includes new methods for the commercial
handling of products, and need not be based on a new scientific discovery. ③ The opening of a
new market, meaning one as yet uninvolved in that particular industrial sector in that particularcountry. Whether the market exists or not is irrelevant. ④ The acquisition of a new source of
supply for raw materials or semi-finished goods. In this case as well, it is irrelevant whether the
supply source is an existing one, one which has been previously overlooked, or one which has
been regarded as impossible to acquire – or, one which must be created from the beginning. ⑤
The reorganization of the industry, meaning the formation of a dominant position (for example,
by forming a trust), or the breaking of a monopoly.
24 Yamamoto (2000), p. 22.
23

10

agglomeration‛ in individual industries in the manufacturing sectors of industrializedcountries, and indicate as well that the growth of rising industries in industrializedcountries is hugely affected by the ‚economics of urbanization.‛

Sonobe and Otsuka (2004), who argue in Roots and Strategies of Industrial Development:
Lessons from the East Asian Experience that ‚an environment conducive to the generationof devices and mechanisms to effectively supplement the market – and especially,‘industrial clusters’ – is vital to the development of industries (in developing countries),‛are looking into the importance of industrial agglomerations. Focusing on industrial
agglomerations in Japan, Taiwan, and China, the researchers analyze their data on theassumption that factors influencing corporate profit differ according to the stage of anindustry’s development and whether that development is driven by merchants orengineers.
We can draw a number of conclusions from their findings. When development isfueled by engineers, important factors are ① at the initial stage, the scale of technicalknowledge and industrial diversity and the proximity of the area to a large city; ② at
the quantitative expansion stage, the scale of agglomeration in the industry concerned
and the amount of technical knowledge (at startup); and ③ at the qualitative
improvement stage, the scale of innovation: technological, institutional, logistical andso on; proximity to a large city; and the scale of agglomeration in the industry
concerned (although this brings negative effects through external diseconomies).
Proximity to a large city produces opposite effects in the case of merchant-driven
development. In merchant-driven agglomerations, distance from a large city correlateswith higher profits at each stage.
If

wesubstitutehigh-techindustrial

clustersindeveloped

countriesfor‚engineer-driven agglomerations at the qualitative improvement stage,‛ we are left
with no doubt about the importance of innovation and the ‚economics ofurbanization.‛

In The Future of Japanese Industrial Agglomerations, Hashimoto (1997) analyzes existing
industrial agglomerations. As one of their economic advantages, he describes how
individual industries taking part in the division of labor profit from the benefits of11

scale and economies of scope already existing for the agglomeration as a whole. For
those advantages to be generated, conditions must be present that will reduce the costsof adjusting the division of labor. In Hashimoto’s view, these conditions – the ‚merits ofcontact‛ among companies – are important25, if hard to explain in economic terms.
‚Merits of contact‛ is a collective term coined many years ago by Alfred Weber,referring to cost reductions and other advantages resulting from benefits of scale
within a cluster, ease of access to labor markets and subcontracting firms specializing
in a particular industry, reduced production and distribution times, access to important
information, and so on 26 . While each of these may be, as Weber put it, an‚agglomeration-derived cost reduction,‛ ‚access to important information (available
only in the region concerned)‛ brings companies benefits exceeding that of lower costs.
These are probably what Takaoka (1997) calls ‚absolute rationality 27 .‛ ‚Absolute
rationality resulting from the merits of contact‛ also has significance as aninnovation-producing environment in the sense that Schumpeter meant it (the pursuitof new combinations).

The above is the substance of existing studies in the field of economics. Other research– primarily by Porter, who expanded the concept of the cluster – has been undertakenfrom the standpoint of business administration. Here I shall summarize the main
points of Porter’s analysis of industrial clusters.
Porter mentions three effects of industrial clusters: ① improved productivity, ②
inducement of innovation, and ③ new business ventures. He repeatedly emphasizes
the importance of ‚improved productivity‛ as an outcome and also as the ultimate
objective. On occasion, however, he places greatest emphasis on innovation as an
outcome. For example: ‚Some of the most important agglomeration economies
represent dynamic rather than static efficiencies and revolve around innovation andthe rate of learning‛ (Porter, 1998, p. 208).
Porter proposes a ‚diamond model‛ (Figure 2-1) to illustrate the environment required
The Future of Japanese Industrial Agglomerations, pp. 163-164.
Yanai (2002), p. 22.
27 Takaoka (1997) uses the term ‚absolute rationality‛ to mean the benefits arising from input
resources unavailable in other regions (regardless of cost), as opposed to ‚relative rationality,‛
meaning cost reduction.
25
26

12

for a cluster. He states that the sources of location advantage are ① factor, or input,
conditions (the quantity and cost of input resources), ② demand conditions (such as
sophisticated and demanding customers), ③ the context for firm strategy and rivalry,and ④ related and supporting industries.

Figure 2-1

Sources of Location Advantage, according to Porter
Context for
Firm Strategy
and Rivalry

Factor (Input)
Conditions

・A local context thatencourages appropriate
forms of investment andsustained upgrading
・Vigorous competition
among locally-based rivals

・Factor (Input) quantity and cost・natural resources
・human resources
・capital resources
・physical infrastructure・administrative
infrastructure
・information infrastructure
・scientific andtechnological infrastructure

・Factor quality
・Factor specialization

Related andSupporting
Industries
・Presence of capable,
locally-based
suppliers
・Presence ofcompetitive relatedindustries

DemandConditions

・Sophisticated anddemanding local
customer(s)・Customer needs that
anticipate those elsewhere
・Unusual local demand inspecialized segments thatcan be served globally

Source: Porter, On Competition, p.325

In the context of firm strategy and rivalry, Porter sees competitive relationships among
local firms as ‚rivalry among neighbors,‛ a pressure that points firms toward creative
differentiation, regardless of their will: in other words, a force driving innovation. It is
one of the reasons why ‚rivalry‛ plays such a central role in Porter’s definition. Here isPorter on the significance of rivalry:
Rivalry with locally based competitors has particularly strong incentive effects
because of the ease of constant comparison and because local rivals have
similar general circumstances (for example, labor costs and local market access),13

so that competition must take place on other things. In addition, peer pressure
amplifies competitive pressure within a cluster, even among indirectlycompeting or non-competing firms. Pride and the desire to look good in thelocal community motivate firms in their attempts to outdo each other. (Porter,
On Competition, p.219)
Porter(1998) states that ‚the geographic scope of a cluster can range from a single cityor state to a country or even a network of neighboring countries.‛28 ‚Drawing cluster
boundaries,‛ he points out, ‚is often a matter of degree, and involves a creative process
informed by understanding the most important linkages and complementarities acrossindustries and institutions to competition. The strength of these ‘spillovers’ and theirimportance to productivity and innovation determine the ultimate boundaries.‛ 29
Kanai (2003) explains the boundaries of spillovers by means of the ‚stickiness of
information‛ concept: how much it costs to transmit locally generated information andknowledge to other areas. Information is ‚stickiest‛ when, as in the case of embedded
information, it is not easily transferable. When sticky information is fundamental to acluster’s success, the cluster may have geographical boundaries which allow for
face-to-face exchange. Porter thus sets the geographical boundaries of a cluster at from100 to 200 miles.30
Porter (2001) also stresses the necessity of economic and social policies within thecluster and the local economy. A productive economy, he says, requires well-educatedworkers with a sense of opportunity, who are healthy, have adequate housing, and who
are willing to invest in upgrading their capabilities. 31 Here Porter seems to beemphasizing the importance of a living environment appealing enough to attract the
intelligent workers the cluster needs. Porter (1998) delivers a rather biting criticism of
the overconcentration of business, politics and many other aspects of life in and aroundTokyo.32 Crowding, with its adverse effect on efficiency, is not the only the only thingthat bothers Porter about the current situation; his criticism also appears to stem from aworldview that sets great store in the quality of life.

Ibid., p.199.
Ibid., p.202.
30 Discussion between Porter and Kanai. Kanai (2003), p.49.
31 Ibid., p.154.
32 Ibid., pp.235-236.
28
29

14

Japanese business economists also have produced a great deal of research on industrial
clusters. Researchers studying the formation and development mechanisms ofindustrial agglomerations and clusters include Itami (1998) et al, whose work onsustaining mechanisms is discussed in detail in the next chapter, as well as Kanai(2003), Maeda (2003) and others. Drawing on various theories proposed in existing
research on industrial agglomerations and clusters and in business economics, Kanai(2003) schematizes the relationship between the variable constituents of an industrial
cluster. As basic factors promoting cluster formation, he points to the existence of ①
local resources and demand, ② related and supporting industries, and ③ innovative
firms in the region. As factors promoting cluster development, he names ① thepromotion of learning, ② competitive innovations, and ③ the existence of ‚Ba‛ inJapanese which means a site for a platform.

Figure 2-2

Relationships between the Variable Constituents of Industrial Clusters,

according to Kanai (2003)
Definition of Industrial Cluster① Interconnected firms, operating in a certain field, concentrate in a certain region.

② Synergistic effects are present.
③ Firms cooperate while competing.
Basic Factors Promoting
Industrial Cluster Formation

Factors in the Development of Industrial Clusters① Promotion of learning② Competitive innovation③ Existence of "Ba" inJapanese which means a site fora platform① Existence of local resources and demand② Existence of related and supporting industries③ Existence of innovative firms

Effects of Industrial Clusters① Improved productivity② Promotion of innovation③ Creation of new business

Source: Kanai (2003), p.69.

From on-site analyses of eight advanced clusters in Europe and North America, Maeda(2003) recursively extracted factors required for the forming and development of acluster. He found eight factors necessary to a cluster’s foundation: ① a specific locality15(travel distance of from one to two hours), ② a specific industry (specialization in one
industry), ③ locally obtainable resources, ④ a focus on response (e.g. to economic
crises), ⑤ a core firm, ⑥ research and development facilities, ⑦ public institutions,and ⑧ visionaries. As development factors, he mentioned: ⑨ contact and interaction
among industry, academia and government, ⑩ opportunities to interact (official andnon-official occasions), ⑪ local competition, ⑫ venture capital and angel investors,⑬ business support (taxation and management experts, technology specialists,
incubators), ⑭ cross-fertilization with other industries, ⑮ international operations,⑯ spinoff ventures, ⑰ partnership with large firms, ⑱ IPOs, ⑲ nationwide
recognition, and ⑳ a certain standard of living and culture.
These studies, based on wide-ranging theoretical research and numerous on-site
analyses, offer many lessons to anyone thinking about cluster formation. They do not,however, include a probing analysis of the time relationships or reciprocal alliances atwork between the different factors in the formative stages. In this paper, therefore, I
analyze the process by which each formative factor starts to operate, the time
relationships between the various formative factors, and the mutually enhancing causal
correlations between them. By doing so, I attempt to examine the formative mechanismof high-tech clusters from a more dynamic perspective.

16

Chapter 3

Constructing a Working Hypothesis for the Formative Mechanism of

High-tech Industrial Clusters

In this chapter I shall clarify the information set down by Itami(1998) in Sustaining
Mechanisms of Industrial Agglomerations (Sangyo Shuseki ga Keizoku Suru Mekanizumu),
and, on that basis, construct a working hypothesis33 for the formative mechanism ofhigh-tech industrial clusters.

3.1 Sustaining Mechanisms of Industrial Agglomerations
Itami (1998), working from the perspective of business economics, names two factors
necessary for sustainability in industrial agglomerations. The first is that theagglomeration have a continuous inflow of external demand through firms (or groupsof firms) having direct contact with external markets (‚demand-channeling firms‛34).
The second is that the entire agglomeration maintain flexibility as a specializing
integrated group. In other words, it must be capable of responding to constant changes
in external demand.
Itami gives three conditions necessary for demand-channeling firms to grow up within
an agglomeration: a rich store of technology; ease of starting up in business; and deep
involvement in the agglomeration by people in frequent contact with external market
information.
For an agglomeration to have sustained flexibility as an integrated group with adivision of labor, Itami cites three conditions: a rich store of technology; lowinter-business adjustment costs; and ease of starting up in business. For division oflabor and agglomeration to take place in a manner which meets the flexibility

In this paper I use the term ‚working hypothesis‛ as defined in the Kojien: ‚A hypothesis,
established not with the objective of providing an ultimate explanation for a given phenomenon,
but as an effective means of controlling or facilitating research or experimentation currently
under way.‛ I do not attempt to offer a uniform theory for the formative mechanism ofhigh-tech industrial clusters. Instead, I assume a case in which a high-tech cluster is formed in aregion without an existing industrial agglomeration. To construct a formative mechanism, I callthis a ‚working hypothesis for the formative mechanism for a high-tech industrial cluster.‛
34 Takaoka(1998) calls these ‚linkage firms.‛
33

17

requirement, he names three further conditions (‚division of labor and agglomeration
factors‛): that the units of labor division be small; that the collection of firms involvedin the division of labor be large; and that there be an active flow and sharing of
information among firms. This mechanism is illustrated in Figure 3-1.

Figure 3-1

The Sustaining Mechanism for Industrial Agglomerations, according toItami (1998)①Existence ofdemand-channelingfirmsFrequent opportunity for contact
with external markets, but deeply
integrated within agglomeration
Rich store of technology

Key to generation ofdemand-channelingfirms from within
agglomeration

Ease of starting up in business②Flexibility as a
specializing
integrated group

Low inter-businessadjustment costs

Factors required to sustain
flexibility of a specializing
integrated group(flexibility factors)

Active flow and sharing of
information among firms
Forms of labor division andagglomeration which promote
ready fulfillment of flexibility
Large collection of firms involved requirement (division of laborin division of laborand agglomeration factors)
Small division-of-labor units

Source: Created from Itami (1998)

Industrial agglomerations analyzed for their sustaining mechanisms tend to be those inlarge cities, such as the cluster of machinery and metal processing SMEs in Tokyo’s Ota
Ward. Perhaps for that reason, the agglomerations treated in this breakdown are‚technological agglomerations‛ in a relatively static sense; they do not necessarily
show a specific relationship between industrial agglomerations and innovation.

In her analysis of the formation and variation mechanisms of industrial agglomerations,Takaoka (1997) treats agglomerations as ‚transaction systems.‛ By this she means asystem in which supply and demand are linked through cross-interactions occurring inevery process involving an economic entity: the search for business partners,
18

negotiations, coordination and so on. More specifically, she uses two qualities toorganize the mechanisms peculiar to industrial agglomerations: utility of division oflabor within the agglomeration, and linkage between the agglomeration and its
markets. She holds that industrial agglomerations take root because of theirself-preserving

functions:The

sustained

generation

of

new

companies

isself-preserving in quantitative terms, while the accumulation of technology andbuilding of reputation35 serve self-preservation in the qualitative sense. She cites risingland prices and technological sophistication as among the external variation factors
affecting the utility of labor-sharing within the agglomeration (resulting in fewer
start-ups), and pursuit of the economics of speed as among those affecting linkage
between agglomerations and markets (resulting in further promotion of reputation). As
an example of internal variation factors (strategic corporate actions) relating to theutility of labor-sharing within an agglomeration, Takaoka points to the generation ofcompanies

withintheagglomeration;

as onerelating tolinkage

betweenagglomerations and markets, she cites technological innovation by companies within
the agglomeration (resulting in the enhancement of both technology and reputation)(Figure 3-2).

Figure 3-2

Formation and Variation Mechanisms of Industrial Agglomerations,according to Takaoka (1997)
Agglomeration’s “genesis”: Ease of obtaining labor force, raw materials; national or local
government measures to attract production facilities, etc.
↓
Agglomeration’s “taking root”: Formation of agglomeration’s systems → Variation in agglomeration’s systems[Formation of agglomeration systems][Variation of agglomeration systems](Mechanisms peculiarInternal factors (noteAgglomeration’s self-preservation
External factors
to agglomerations)1)① Utility of division of Continuing business creation Fewer start-ups, due to Generation of linkage
rising land prices,labor within thefirms within thetechnologicalagglomeration
agglomeration② Important role oflinkage between the
agglomeration and themarket (linkage firms;
note 2)

Accumulation of technology
and building of reputation(note 3)sophistication and otherfactors
Enhancement of
reputation, due todemands for economiesof speed and otherfactors

Acquiring of neworientations due totechnological advances
within the
agglomeration

Source: Takaoka (1997), with additions.
Notes:1) Internal factors in system variation: strategic actions by member firms and linkage firms.
Notes:2) Takaoka (1998) describes the role played by linkage firms in ②.
Notes:3) In Takaoka (1998), the term used is “accumulation of technology to a level befitting reputation.”

35

Takaoka (1998) puts this as ‚accumulation of technology to a level befitting reputation.‛19

In ①, ‚utility of division of labor within the agglomeration,‛ Takaoka sees new
business creation as the key to an agglomeration’s maintenance (self-preservation) in
quantitative terms and also as an external factor in the logic of change, taking theexistence of a division-of-labor system as a given condition.
In ② , Takaoka examines the role of reputation in the ‚linkage between the
agglomeration and the market,‛ regarding linkage firms as the main players. She views
the accumulation of technology as a key factor in creating reputation. Takaoka treats
innovation as a factor in changing reputation, although this is not specifically
expressed.

Kikkawa (2001) uses five keywords to summarize the theories of Itami(1998),
Takaoka(1997) and others on the mechanisms peculiar to industrial agglomerations.
Three of these concern mechanisms that work within an agglomeration: ① division oflabor, ② technology accumulation, and ③ new business creation; two concern
mechanisms that link the interior of an agglomeration with the outside: ① linkage
firms, and ② reputation.
Kikkawa summarizes the four keywords mentioned by Itami (1998) in grouping thesustaining mechanisms of industrial agglomerations into three that concern
mechanisms working within an agglomeration (division of labor, technology
accumulation, and new business creation), and one that concerns mechanisms linking
the interior of an agglomeration with the outside (demand-channeling firms).
Of the five keywords mentioned by Takaoka (1997) in discussing the formation andchange mechanisms of industrial agglomeration systems, Kikkawa lists three that workwithin an agglomeration (division of labor, technology accumulation 36 , and new
business creation), and two that link the interior of an agglomeration with the outside(linkage firms37 and reputation).

Takaoka herself sees a relationship between technology accumulation and reputation,
discussing it in the section on ‚mechanisms linking the inside and outside of agglomerations.‛
37 In discussing the connection between agglomerations and markets, Takaoka (1998) defines
firms which perform (demand-supply) linkage functions as ‚linkage firms.‛
36

20

Figure 3-3 shows industrial agglomeration mechanisms as summarized by Itami (1998)
and Takaoka (1997) and their relationship to the summary by Kikkawa (2001).

Figure 3-3

Industrial Agglomeration Mechanisms as Summarized by Itami (1998)

and Takaoka (1997) and Their Relationship to the Summary by Kikkawa (2001)

Kikkawa (2001)① Mechanisms that "Division of labor"
work within an
agglomeration"Technology
accumulation""New businesscreation"② Mechanisms that "Linkage firms"
link the interior of"Reputation"
an agglomeration
with the outside

Itami (1998)
Takaoka (1997), Takaoka (1998)← (Flexible) division of (Utility of) division of labor
labor (agglomeration (within agglomeration)groups)(Depth of) technology
Technology←
accumulation←(Ease of) new businesscreation← (Existence of)demand-channeling← firms

accumulatio(Sustained) new nbusiness

Linkage ofcreation
agglomeration andmarkets (linkage firms (Building
link demand and supply) of)
reputation

Sources: Created from Itami (1998), Takaoka (1997), Takaoka (1998), and Kikkawa(2001).

Although I cite technology accumulation here as an internal mechanism of an
agglomeration, I do not treat innovation directly.

3.2 Summarizing the Breakdown Mechanisms of Industrial Agglomerations
I should now like to summarize the mechanisms which contribute to the breakdown of
an industrial agglomeration. Of the ‚lock-in effects‛ described by Arthur (1994), it isthe ‚negative effect‛ which has the potential to bring about an agglomeration’s decline.
The lock-in effect is thought to possess ‚positive effects‛ which, during the formation
process or other early stage of an agglomeration’s existence, work by means of the‚economies of agglomeration‛ to promote the agglomeration’s growth by keeping
individual companies within the site or attracting new ones to it. Once anagglomeration is formed, however, the lock-in effect can work to impede reform andother necessary change. If member firms become overly attached to certain values,
ideas, or methods, they may fail to keep up with innovation. Thus the lock-in effect has
its negative aspects as well.

21

These negative effects may be the flipside to the positive lock-in effects possessed byindustrial agglomerations during the formative period. By clinging to past successes,
firms in an agglomeration may come to lag behind the general trend of innovation.
According to Yamashita (1998), the economies achieved by industrial agglomeration
ultimately amount to those of scale and of scope. While the individual phases ofplanning and design, trial, and volume production tend to differ in terms of theprincipal economies they achieve, the overall balance of these two types of economies
is established through the mutually limiting relationship of product variation to
production scale. This balance allows for an interplay linking the market factors andtechnological factors to be maintained within an agglomeration. The logic of
agglomeration breakdown can be summarized in this way: Product variation may beeither too small or too large. In the former case, overdependence on economies of scale
during the volume production phase may cause economies of scope to perform
inefficiently during the planning and design phases, resulting in further reductions in
product variation. In the latter case, the region may not be able to fill all functions
required during the trial and volume production phases, resulting in work being sentout of the agglomeration into the surrounding area and impeding the efficientperformance of economies of scale during the volume production phase. The latter casecan be seen as the transformation of an industrial agglomeration into a commercial
agglomeration. In the former case, however, the agglomeration’s survival would be injeopardy should there be, for example, any drastic change in demand for a small
variety of products38.
Common to these two types of logic is a decline in the innovative capacity of theindustrial agglomeration as a whole. This refers primarily to a decline in the capacity
for making innovative products, but, in Yamashita’s two examples, breakdowns during
the shift to volume production can be read as declines in process innovation capacity.
In this sense, maintaining an industrial agglomeration raises the important question of
how one can maintain innovative capacity by using a logic opposite to that whichgoverns an agglomeration’s breakdown.

3.3 The Formative Mechanisms of High-tech Industrial Clusters
38

Yamashita calls a phenomenon of this kind an ‚unintentional effect.‛22

In this section I use the formative mechanisms of industrial agglomerations examinedby Itami, Takaoka, and Kikkawa as starting points in constructing a working
hypothesis39 for the formative mechanisms of high-tech industrial clusters. I havealready explained the differences between industrial agglomerations and industrial
clusters in Chapter 1. Here, I first consider the sustaining mechanisms of industrial
agglomerations composed of firms in high-tech fields. Next I examine the mechanisms
by which high-tech industrial agglomerations are formed, assuming the ‚formative
process for high-tech industrial agglomerations‛ to be the process leading up to thepoint where the sustaining mechanisms of high-tech industrial agglomerations begin tofunction. I assume the existence of principal entities which drive the formative process– which prompt, in other words, the initial functioning of the sustaining mechanisms.
These are the ‚activity groups‛ included in the definition of ‚industrial cluster‛ in thispaper. In this paper I assume the existence of pressure or encouragement by activity
groups (or cooperation or alliances that may occur among local actors as a result)because I believe them to be features of industrial clusters which aid in distinguishingthem from industrial agglomerations. It is for this reason that I make high-techindustrial clusters, rather than high-tech industrial agglomerations, the subject of mydiscussion.
As I have mentioned, I focus here on the formation of high-tech industrial clusters inareas that had no previous agglomerations related to high-tech industry40, rather thanthose that developed from existing agglomerations of machinery or similar industries. I
do this so that we may think about formative mechanisms under the most easily
understood initial conditions. I also wished to grasp the implications of attempts toform high-tech industrial clusters by areas not in possession of a full set of local
resources – utilizing, for example, the local resources of a research university.
Innovation is thought to play a greater role in high-tech industrial agglomerations (orAs I noted earlier, here it is assumed that a high-tech industrial cluster forms in an area
having no existing industrial agglomeration. As ‚high-tech industries,‛ one thinks primarily ofIT (or ICT) regarded as typical of the field.
40 An example of an existing industry related to high-tech industry is machinery, assuming thatthe high-tech industry aspired to is in the IT field. In some urban areas, it is usual for there to bea certain level of industrial and technological infrastructure. Here, however, such urban areas
cannot be considered as agglomerations of ‚related‛ industries.
39

23

clusters)41 than in groupings of traditional industries. As I noted earlier, innovation in
traditional industries is not treated specifically in the logic of continuation. It appears
instead in the logic of breakdown, in the observation that certain factors, such as anegative lock-in effect, can produce a breakdown-inducing decline in the innovative
capacity of an industrial agglomeration.
The situation is different for high-tech industrial agglomerations, even setting asidecases in which attempts have been made to attract production functions. Innovation
appears to be deeply involved in the very process by which a branch factory (forexample) develops into a home base42 for a certain area, takes root there, and expands
its sales and scale of operation. For a high-tech agglomeration, the logic of formation andlogic of development seem closely linked with innovation.
Thus, in constructing a working hypothesis for the formative mechanisms of high-techclusters, I explicitly introduce innovation as a factor.
As a first step in putting together the hypothesis, prior to discussing the sustaining
mechanisms of high-tech industrial agglomerations, I examine the relationshipbetween industrial agglomerations and innovation as it concerns high-tech industry.

3.3.1 Innovation and Its Relationship to Industrial Agglomerations
Kikkawa (2001), while agreeing with Yamasaki (2000) that ‚research conducted inJapan … has failed to present any framework that provided a profound insight into therelationship between industrial agglomerations and innovation43,‛ argues that ‚theThrough 3.3.2 I use the term ‚industrial agglomerations‛ in reference to situations classifiable
as either an industrial agglomerations or an industrial cluster.
42 By ‚home base,‛ I mean a base of operations at which a firm performs the kinds of activities
Porter refers to as ‚home base activities‛: ‚those involved in the creation and renewal of thefirm’s product, processes, and services.‛ (Porter (1998), p.261)
43 Yamasaki (2000), p.84. In the same book, Yamasaki himself says: ‚The innovative capability of
an industrial agglomeration does not derive from the drawing force of the factories’ location, orfrom cost advantages, as discussed in the study of industrial location. Rather, what drives
innovation is the location of talented people to take charge of future technological innovation‛(p. 78). He goes on to say: ‚The factors that enhance innovative potential are found in
agglomeration of workers, scientists, and managers capable of promoting innovation, and localorganizations and leaders who can efficiently turn these factors into innovation‛ (p. 85). Vital to41

24theory presented by Takaoka (1998) on the dynamic mechanisms of industrial
agglomerations could serve as a starting point‛44 for creating such a framework.‛
According to this theory, linkage firms promote innovation by uniting existent or
non-existent demand (non-manifest demand) and existent or non-existent technology(latent technology) (Figure 3-4).

Figure 3-4

How Linkage Firms Unite Technology and Demand, according to

Takaoka (1998)(Demand from outside
agglomeration)(Technology from within
agglomeration)[Existent demand](Note 1)

[Existent technology](Note 2)

[Non-existent
demand][Non-existenttechnology]

Source: Created from Takaoka (1998)
Notes:1) Includes demand currently latent due to relations with the agglomeration.

Notes:2) Includes technology currently latent within the agglomeration.
Notes:3) Boldness of line (added by author) indicates frequency of linkage
through linkage firms. Linkages of this kind (excluding those of manifest
demand and manifest technology) can be seen as a form of innovation.
Compared with other environments, innovation occurs more easily within an
agglomeration, resulting in the higher productivity and product differentiation thatsustains the agglomeration. I now wish to consider the extent to which such sustaining
mechanisms of an agglomeration, including the innovation-stimulating functions oflinkage firms, can be seen as factors in this process.
There are a variety of causal correlations among Kikkawa’s five keywords regarding
the sustaining mechanisms of industrial agglomerations. I shall therefore attempt toclarify which factors promote innovation, not only in the context of ‚technology
both industrial agglomerations and innovation are a concentration of corporate workers andscientists, and the right ways of coordinating them.
44 Kikkawa (2001), p.111

25

accumulation‛ and ‚linkage firms,‛ but in relationship to each of the five keywords.
First, division of labor: ① In industrial agglomerations with a developed division oflabor system, the range of materials and related services required by the industry
concerned is relatively diverse. This can be regarded as favoring the ‚carrying out (of)new combinations,‛ Schumpeter’s term for innovation. This range of choice exists inregard not only to type but also to things such as cost and speed. Information on partsor services suppliers – their technology, behavior, and so on – is readily available. Since
all are members of the same community, firms benefit from a containment ofopportunistic behavior. (This is also true in relation to the procuring of generalintermediate goods.)
Next, technology accumulation: ② Industrial agglomerations are home to large stocks oftechnology and skills involving products, services, manufacturing processes, rawmaterials, sales routes and other resources. A plentiful supply of existing technology
and skills forms the basis for new combinations, and is thus likely to favor innovation.
This situation is similar to that described in ①. Another factor favoring innovation is
the presence in industrial agglomerations of large numbers of people skilled in suchtechnologies. 45 Needless to say, the development of elemental technologies, forexample, requires scientific knowledge or other resources unobtainable by merely
combining technologies or skills that already exist. In such cases, industrial
agglomerations may not always offer the most favorable environment for development.
Viewed from the perspective of the individual firm, there may be problems in getting
access to (existing) technologies or skills, as well as in utilizing them. For the
agglomeration as a whole, however, the availability of such large volumes oftechnology and know-how is an undiluted advantage.
Not all aspects of technology accumulation, however, are advantageous at all times.
Industrial agglomerations tend to foster the accumulation of technologies that suit theagglomeration’s existing reputation, thus favoring innovation that does so as well.
Excessive concern over one’s existing reputation, however, can produce the negativelock-in effect of penalizing firms whose innovation takes a new or different path. Care

According to Keijiro Otsuka (2005), the spillover of information (imitation) that precedes
innovation ‚is inseparably related to the development of the labor market and the movement ofskilled workers which that entails.‛ (pp. 85-86)
45

26

should be taken that such firms are not left behind.46
Third is linkage firms. As noted by Takaoka (1998), these have the function of uniting(external) demand and (internal) technology. Linkage firms have been called the‚gatekeepers‛ uniting demand and supply. By definition, they are key players inlinking a cluster’s internal entities with those outside. Takaoka (1998) examines theways in which they join existent or non-existent (non-manifest) demand with existentor non-existent (latent) technology. The creation of non-existent (non-manifest) demand
and the drawing out of non-existent (latent) technology are clearly ‚new combinations,‛
or innovation. In this sense, ③ linkage firms are in the position to perform or promote
innovation. Thus, industrial agglomerations with linkage firms have more
opportunities to innovate.
Fourth is reputation. While much depends on the extent to which an agglomeration cangather demand and attention from the outside, ④ by facilitating the inflow of trial
production and diverse types of demand, reputation promotes ‚innovation throughlinkage firms.‛ Reputation also encourages person-to-person interchange; this is thesource of much information, and increased opportunities for innovation, within an
agglomeration.
At the same time, because the flow of demand and information into an agglomeration
tends to be consistent with its existing reputation, there is, as I mentioned in discussing
technology accumulation, the potential for a negative lock-in effect under which certain
types of innovation will be restricted. This, too, is an important issue.
Fifth is business creation. With plentiful human resources and both volume anddiversity of demand, industrial agglomerations provide a favorable environment forbusiness start-ups. ⑤ Start-up firms tend to occupy niche positions. Compared withlarge firms, they are adept at dealing with changes in technological paradigms andmay even be the instigators of such change. Thus, industrial agglomerations with large
numbers of start-ups are more likely to carry out radical or disruptive innovation47.
This is believed to be one of the reasons why the relationship between industrial
agglomerations and innovation can be difficult to understand.
47 According to Christensen (1997), radical innovation means the most pioneering innovation,
representing comparatively important departures from existing technologies, and is antitheticalto incremental innovation. Disruptive innovation is antithetical to sustaining innovation; itbrings to the market values and standards that differ completely from conventional ones, and46

27

More start-ups will increase the total number of firms in an agglomeration, giving new
depth to its division of labor or accumulation of technology. Innovation thus progresses
via the logic of division of labor and technology accumulation.

In addition to these five points, there is another of crucial importance. This is that ⑥
innovation is nurtured by the keen competition that exists within an agglomeration. As
Porter emphasized, it is the fierce competition that exists between a cluster’s rival firmsthat makes them more likely (than others located elsewhere) to work seriously at
differentiating their products and services and at achieving the innovation required to
do so. Porter warned, however, that any cluster is susceptible to the suppression ofcompetition through sweetheart agreements, cartels, or other dubious ties,48 and thatthese will suppress innovation as well.

Thus, each of the above is an advantage for innovation to some degree or another.
Points ② and ④, however, have the potential to depress innovation by means of thenegative lock-in effect if too much is attached to an established reputation. Viewed as awhole, industrial agglomerations offer fundamentally favorable conditions forinnovation.
Kanai (2003) says that a ‚double-loop study‛ (Argyris and Schön, 1978), as used inorganizational theory, is important to preventing this negative lock-in effect.49 This is
opposed to the ‚single-loop study.‛ Conducted within an existing framework, thesingle-loop study may, in certain circumstances, encourage a negative lock-in effect andthereby weaken the agglomeration. In contrast, the double-loop study goes beyond
existing frameworks to transform conventional values. Bringers of different types ofknowledge into an organization (in this case, an industrial agglomeration) play animportant role in a double-loop study. In double-loop studies on industrial
agglomerations, the greatest attention is paid to the roles played by universities, public

therefore undermines the competitive advantage of the existing products of promising firms.
Firms with proven track records are assumed to apply their resources to sustaining innovationand to excel at incremental innovation as well. To put it another way, we can view new entrants
to a market, including start-ups, as being more suited to disruptive or radical innovation.
48 Porter (1998), p.243.
49 Kanai(2003), p.63.

28

research institutions, and individual visionaries50, rather than affiliated firms in a given
field.51

3.3.2 Sustaining Mechanisms of High-tech Industrial Agglomerations
Next, I examine the sustaining mechanisms of high-tech industrial agglomerations.
Because of the importance of innovation to high-tech-tech agglomerations, I shall makereference to the relationships between agglomerations and innovation we examined
above.52 To the two mechanisms suggested by Itami (1998) – ① the diversity andflexibility of an agglomeration with a cooperative structure, and ② the presence ofdemand-channeling firms (linkage firms) – I should like to add another: ③ ease ofinnovation. As I discussed earlier, industrial agglomerations generally present very
favorable conditions for innovation, and innovation is regarded as a key factor in thecontinuance of industrial agglomerations, particularly those of the high-tech variety.
We might also add another mechanism – ④ an environment that fosters the creationand growth of start-ups – primarily for its role in enhancing ① and ②. As we saw in
3.3.1, industrial agglomerations provide a comparatively favorable environment forentrepreneurship; an actual increase in the number of new firms gives new depth to an
agglomeration’s division of labor and increases the likelihood of radical and disruptive
innovation. Serving to support all four of these sustaining mechanisms is a fifth, ⑤
promotion of reputation. Places known as industrial agglomerations tend to haverelatively established reputations. Reputation helps demand-channeling firms bring in
demand, promotes innovation 53 , and draws in new firms and entrepreneurs. A
summarization of the sustaining mechanisms of high-tech industrial agglomerations,

In the context of industrial clusters, a ‚visionary‛ is a key person in the region or
agglomeration, capable of instilling in it a well-conceived vision for its development. Other
terms for such a person include ‚champion‛ and ‚first-level influencer.‛ (Leaders who support
and carry out the visions of first-level influencers are called ‚second-level influencers.‛)
51 I have focused here on the importance of universities and other local actors in promoting
double-loop studies within industrial agglomerations. But for these actors to give of their best,
they must have a shared conception of their goals – something the efforts of activity groups canhelp develop. Thus there is growing appreciation for activity groups and the clusters in which
they work.
52 In summarizing the sustaining mechanisms of high-tech industrial clusters, I draw upon thefive keywords proposed by Kikkawa(2001).
53 I have previously mentioned that over-adherence to existing reputation carries the possibilityof suppressing innovation through a negative lock-in effect.
50

29

therefore, would look like this54:① Diversity and flexibility of agglomeration with cooperative structure② Presence of demand-channeling firms③ Ease of innovation④ Environment fostering creation and growth of start-ups⑤ Promotion of reputation

3.3.3

Working Hypothesis for the Formative Mechanisms of High-tech Industrial

Clusters
Based on the five sustaining mechanisms summarized above, I shall now look at theformative process of high-tech industrial agglomerations. I regard the process bywhich these five sustaining mechanisms begin to work as the ‚formative process.‛
Assuming the presence of the activity groups included in this paper’s definition ofindustrial clusters, the process will advance by means of the efforts of those groups aswell as various other factors. In the following, therefore, I speak of the formative
process of industrial clusters rather than that of industrial agglomerations.55

In order for the first mechanism – diversity and flexibility of an agglomeration with acooperative structure – to begin to work, the first and most important requirement is aconcentration of a variety of firms in a particular field in a particular geographic area.
Leaving aside for a moment the matter of flexibility, the first necessity is a growing
agglomeration of firms.
For mechanism two – the presence of demand-channeling firms – to take effect, such
firms must begin to emerge within the agglomeration. The ‚appearance ofdemand-channeling firms‛ is thus an appropriate term for the formative process. FromI examined ‚keen competition within the agglomeration‛ as a factor favoring innovation inconnection with the relationship between high-tech agglomerations and innovation. I did not,however, treat it as a sustaining mechanism of high-tech agglomerations. Since many aspects of
it are subsumed within ③, I chose to eliminate it here.
55 In this paper, the feature that most distinguishes industrial clusters from industrial
agglomerations is the presence of activity groups and their influence on the formation (orcontinuation) of clusters.
54

30

this point on, I will refer to demand-channeling firms as ‚anchor firms56.‛ In this report,
I use the term ‚anchor firm‛ to mean ‚a firm that brings into an agglomeration a
sizeable level of demand originating outside it, and contracts work of some kind fromother firms within it.‛ There is little difference, therefore, between this term and‚demand-channeling firm.‛ ‚Anchor‛ seems preferable in this case because the word,in both its literal and figurative sense, more accurately describes the crucial role of such
firms in an industrial cluster and their final position in the (local) value chain. In thefollowing discussions, therefore, I refer to the ‚emergence of anchor firms‛ as a factor
in the formative process.
To activate the third mechanism – ease of innovation – there must be changes that
improve the environment for innovation. This can be regarded as a formative process.
Similarly, the fourth mechanism – an environment fostering the creation and growth ofstart-ups – calls for improvements in the entrepreneurial environment. This, too, isconsidered a formative process.
The prerequisite for the fifth mechanism – promotion of reputation – is establishment of
reputation. This is a formative process.
We should make note of one point in regard to the ‚flexibility‛ mentioned inmechanism ①. Of the three requirements for flexibility given by Itami (a rich store oftechnology, low inter-business adjustment costs, and ease of starting up in business),
two are thought to be achievable after the fact: ‚a rich store of technology‛ during theprocess of mechanism ③ (ease of innovation), and ‚ease of starting up in business,‛during the process of mechanism④ (an environment fostering the creation andgrowth of start-ups). As for the remaining flexibility requirement (low inter-businessadjustment costs), although the flow and sharing of information (requirements fordivision of labor and agglomeration according to Itami) are important to its
achievement, I assume that the presence of activity groups and adjustment capabilities,
considered prerequisites for industrial clusters in this paper, produce a certain level ofexchange and information-sharing among companies and other local actors. Therefore,
for ①, I do not specify the process by which flexibility is achieved as a discrete
formative process.

56

These are also referred to as ‚anchor companies.‛

31

The above can be summarized as follows:

Sustaining mechanisms ofFormative processes ofhigh-tech industrial clusters

high-tech industrial clusters① Diversity and flexibility of a
specializing integrated group→① Growth in the
agglomeration of firms② Presence of demandchanneling firms→② Emergence of anchor firms③ Ease of innovation→③ Improvement of theenvironment for innovation④ Environment fostering
creation and growth of startups⑤ Promotion of reputation→④ Improvement of theentrepreneurial environment→⑤ Establishment of reputation

As we saw in section 3.3.1, ‚Industrial Agglomerations and Innovation,‛ there are
mutually enhancing causal correlations at work among the mechanisms sustaining
industrial agglomerations. Similar relationships can be seen among the five formative
processes listed above. The advancement of one formative process will boost theadvancement of other formative processes.
The mutually enhancing causal correlations among the five formative processes areshown in graphic form in Figure 3-5 (p. 38). Considering the degree of strength of themutually enhancing causal correlations at work among the various formative processes,
the point at which each formative process begins, and the possibility of activity groups
influencing the formative processes, I assume that the five formative processes will
advance in order of probability. I therefore rearrange the processes in the following
order, which is how they appear in Figure 3-5:
I.

Improvement of the environment for innovation

II. Growth in the agglomeration of firms
III. Emergence of anchor firms
32IV. Improvement of the entrepreneurial environment
V. Establishment of reputation
Among the five formative processes, those in which the influence of activity groups is
possible, and in that sense are more or less controllable57, are I (improvement of theenvironment for innovation), II (growth in the agglomeration of firms) and IV(improvement of the entrepreneurial environment). Processes III (emergence of anchor
firms) and V (establishment of reputation), however, in many ways represent theoutcome of other processes, and their advancement is not likely to be promoted in any
direct way by activity groups. First, therefore, I look at the mutually enhancing causal
correlations between I, II and IV: I → II (improvement of environment for innovation →growth in agglomeration of firms), II → IV (growth in agglomeration of firms →improvement of entrepreneurial environment), and I → IV (improvement ofenvironment for innovation → improvement of entrepreneurial environment). Because
these begin to work more strongly, and/or sooner, than causal correlations moving in
the opposite direction, I position them between II and IV. V is placed last because it
largely represents outcomes of other processes. By placing ‚promotion of reputation‛at the end, I do not mean to suggest that it has little effect in advancing the otherprocesses; instead, I am pointing out it requires more time than the others to move
forward – that is, for a certain level of reputation to be achieved.

The mutually enhancing causal correlations between the various formative processes
are as indicated in Figure 3-5. Starting with process I, ‚improvement of theenvironment for innovation,‛ I would like to add some brief comments.
① Places with good universities and public research and development institutions are more
attractive to high-tech firms. Areas with high-quality universities and other higher
learning institutions and public research bodies (including national research anddevelopment projects; same below) produce research and technology professionals
who draw the interest of high-tech firms. The result is an upswing in interest in
districts possessing these assets.

The ‚control‛ referred to here does not mean total control over every aspect of the process,but a certain measure of influence over, or encouragement of, even some aspects. The entities
exerting this control are the ‚activity groups‛ mentioned in this paper’s definition of industrial
clusters, composed of specific key organizations or persons from the region.
57

33

② An environment supporting innovation promotes the growth of existing firms, encouraging
them to make the district their home base and facilitating the emergence of anchor firms. The
idea behind this causal correlation is that innovation is the most important factor in thegrowth of firms operating in high-tech industries.
③ As the presence of universities and public research and development institutions produces
more innovative “seed” technologies and workers familiar with them, opportunities forstart-ups increase. The results of work conducted at universities and other institutions ofhigher learning, public research institutions, and so on serve as ‚seeds‛ forpath-breaking technological breakthroughs. With more of these institutions, there are
more such ‚seeds‛ and more opportunity to form the start-up companies that offer one
route to their commercialization.
④ Places with good universities and public research and development institutions enjoy
enhanced reputations as research meccas. When an area can claim more and better research
universities and public research institutions in a certain field of industry, it can attain areputation as a center of research in that field. While this may not lead directly to a
reputation as an industrial cluster, it does have an indirect effect.
⑤ As firms grow in number, they serve as leaders in facilitating innovation. Although there
are many actors that influence the process of innovation in a district, firms naturally
play a vital role. We can assume that growth in the agglomeration of firms will provide
a favorable environment for innovation.
⑥ As firms grow in number, the probability of anchor firms emerging increases as well. This
causal correlation, rooted in the theory of probability, derives from the assumption thatas the number of firms in a local agglomeration grows, the probability that firms thatwill grow into anchor firms will grow in proportion.
⑦ As firms grow in number, the district’s industrial ecosystem deepens, increasing theopportunities for new business creation. Even if the emergence of an anchor firm has no
impact on the entrepreneurial environment, an increase in the number and diversity offirms will enrich what Yamasaki (2002) calls the ‚industrial ecosystem,‛58 thereby
Yamazaki(2002) uses the term ‚industrial ecosystem‛ to describe the value chain in anindustrial agglomeration, likening it to the food chain in a biological ecosystem (Ibid., p.p.4-5).
58

34

increasing the opportunities for business creation.
⑧ As firms grow in number, the district enjoys a rising reputation as an industrial
agglomeration. This is based on the idea that growth in the number of firms in an
agglomeration is fundamental to the establishment of its reputation as an industrial
cluster.
⑨ Anchor firms link demand to technology, facilitating innovation. This is based on an idea
I discussed earlier, that anchor firms (linkage firms) promote innovation by linking
demand from outside an agglomeration with technology inside it. But in addition to
performing this linkage function, anchor firms themselves possess large stores oftechnological information and the capacity to carry out important innovations. They
thus promote innovation via both routes.
⑩ As anchor firms emerge, they produce increased business opportunities which attract
outside firms to the area. This correlation is based on the idea that the appearance ofanchor firms enriches a district’s ‚industrial ecosystem,‛ causing outside firms tobecome more interested in locating there as subcontractors. The cause-and-effectrelationship is rather weaker here than in ⑪, where the emergence of anchor firms
directly increases local opportunities for new business creation.
⑪ As anchor firms emerge, business opportunities increase, providing more opportunities forthe creation of new subcontracting firms. The logic here is that the emergence of anchor
firms enriches the local ‚industrial ecosystem,‛ enhancing the possibility of new
high-tech firms appearing as subcontractors.
⑫ The reputation of a district benefits when it becomes known as the ”home base“ of an anchor
firm. Most firms regarded as ‚anchor firms‛ are either well-known or growing. Since
this fame extends to the place where they are headquartered, the home district also
enjoys an enhanced reputation.
⑬ Improvement of the entrepreneurial environment results in more new firms, thus
facilitating radical and disruptive innovation. High-tech start-ups are well-positioned tocarry out innovation, either radical or disruptive; many are founded precisely for that
purpose. According to this logic, innovation of these types will flourish in places that
support the creation of new business. The strength of the causal correlation depends on
35

how much of a role start-ups play in innovation as a whole.
⑭ Improvement of the entrepreneurial environment leads to more new firms and a deepeningof the corporate agglomeration. This can be taken as a matter of course, provided that the
number of businesses created is not smaller than the number of those that close down.
⑮ An improved entrepreneurial environment leads to more new firms, thereby enhancing the
district’s reputation as a home for rising industries. The causal correlation here holds thatplaces offering a good environment for new business creation and their resulting
outcomes – a suitable environment for starting a business; growing numbers ofstart-ups actually benefiting from such an environment; the emergence of
rapidly-growing, listed firms from the overall number, and so on – can enjoy a growing
reputation as centers of rising industry, and, consequently, as high-tech clusters.
⑯ An established reputation facilitates the inflow of information on markets and technology,
thus encouraging innovation. In certain ways, the establishment of a reputation is itself
an outcome of other processes, and therefore occurs after the other processes are tosome extent under way. Once something of a reputation has been achieved, however,transactions, inquiries, meetings, academic conferences and so on provide inboundroutes for information on the market for the industry involved, as well as for
information on related technology. This has the potential to trigger innovation in theregion.
⑰ Districts with an established reputation are more appealing to firms considering locationsites. Once a district achieves a certain reputation, it attracts greater interest fromhigh-tech firms from other regions, including those overseas. By extension, these firms
may have more interest in locating in the district. Their interest would include setting
up small-scale centers for acquiring technological information.
⑱ Districts with an established reputation hold more interest for potential supporting
businesses. Once a district achieves a certain reputation, it draws the interest of venture
capitalists, business angels, and other individual and corporate experts providing
support services to start-up firms. This serves to further improve the entrepreneurial
environment.
Direct causal correlations for the directions IV → III (improvement of entrepreneurial
36

environment → emergence of anchor firms) and V → III (establishment of reputation→ emergence of anchor firms), are difficult to conceive. Therefore, these are notincluded in the correlations listed above.
In the initial stages of cluster formation these five formative processes can be expectedto advance rather slowly in roughly the above order. Subsequently, through processes I
through V, mutually enhancing causal correlations begin to link the various formative
processes, giving momentum to the cluster’s formation. I therefore break the formative
period for industrial clusters into two parts: the foundation period, during which there isconsiderable advancement in the five formative processes and a fairly cohesive
agglomeration of firms, and a development period, during which mutually enhancing
causal correlations go to work among the different formative processes, spurring theirprogress and enlarging the scale of the corporate agglomeration. In the following
discussion I refer to the five formative processes (and the probability of their order ofadvancement 59 ), the mutually enhancing causal correlations among the formative
processes, and the entirety of the two periods, the foundation period and thedevelopment period, as the working hypothesis for the formative mechanism of high-techindustrial clusters.

Probability regarding the order of the five formative processes is assumed mainly for thefoundation period. During the development period, the start of mutually enhancing causal
correlations among all processes means there is less disparity between the probability of eachprocess’s advancement than during the foundation period.
59

37

Figure 3-5

The Formative Mechanism of High-tech Industrial Clusters (FiveFormative Processes and Their Mutually Enhancing Causal Correlations)⑯(Improvements in infrastructure andinstitutions are feasible.)
I. Improve me n t ofth e e n viron me n t
for in n ovation
⑤
②
①

④
③

⑰
V. Establish me n t ofre pu tation⑧(Cannot be
controlled.)

⑭
⑬

⑨
⑦
⑫

⑱

⑮

II. Growth in th e
agglome ration offirms(Infrastructure
improvement and⑥efforts to attract
firms are feasible but
cannot be directly⑩
controlled.)

IV. Improve me n t⑪
III. Eme rge n c e ofof th ean c h or firms
e n tre pre n e u rial
(Cannot be controlled.)
e n viron me n t(Improvements in infrastructure and institutions arefeasible.)① Places with good universities and public research and development institutions are more attractive to hightech firms.
② An environment supporting innovation promotes the growth of existing firms, encouraging them to make the
district their home base and facilitating the emergence of anchor firms.
③ As the presence of universities and public research and development institutions produces more innovative“seed” technologies and workers familiar with them, opportunities for start-ups increase.
④ Places with good universities and public research and development institutions enjoy good reputations as
research meccas.
⑤ As firms grow in number, they serve as leaders in facilitating innovation.
⑥ As firms grow in number, the probability of anchor firms emerging increases as well.
⑦ As firms grow in number, the district’s industrial ecosystem deepens, increasing the opportunities for new
business creation.
⑧ As firms grow in number, the district enjoys a rising reputation as an industrial agglomeration.
⑨ Anchor firms link demand to technology, facilitating innovation.
⑩ As anchor firms emerge, they produce increased business opportunities which attract outside firms to thearea.
⑪ As anchor firms emerge, business opportunities increase, providing more opportunities for the creation of
new subcontracting firms.
⑫ The reputation of a district benefits when it becomes known as the “home base” of an anchor firm.
⑬ Improvement of the entrepreneurial environment results in more new firms, thus facilitating radical anddisruptive innovation.
⑭ Improvement of the entrepreneurial environment leads to more new firms and a deepening of the corporate
agglomeration.
⑮ An improved entrepreneurial environment leads to more new firms, thereby enhancing the district’s
reputation as a home for rising industries.
⑯ An established reputation facilitates the inflow of information on markets and technology, thus encouraging
innovation.
⑰ Districts with an established reputation are more appealing to firms considering location sites.
⑱ Districts with an established reputation hold more interest for potential supporting businesses.
Note: For processes IV→III (improvement of the entrepreneurial environment → emergence of anchor firms)
and V → III (establishment of reputation → emergence of anchor firms), direct causal correlations are difficult
to conceive and therefore are not included in the above.

38

3.4 Verifying the Working Hypothesis: Selection of a Region for Analysis
In the next chapter I attempt to verify my working hypothesis for the formative
mechanisms of existing high-tech industrial clusters by examining the formation of the
ICT cluster in Oulu, Finland. Oulu is northern Finland’s principal urban center, and,while it has a relatively developed industrial base, its long history revolves aroundpolitics, commerce and trade rather than industry. The industries that existed until the
1950’s – paper and pulp, chemical fertilizers, leather goods and others – were not thesort that form the groundwork for IT industries. But the opening of the University ofOulu, and especially its electrical engineering department, proved the springboard for
gradual but sustained efforts by activity groups interested in forming a high-techindustrial cluster. Ultimately they succeeded in creating one of the leading ICT clusters
in northern Europe.
There were three reasons for choosing Oulu as my subject for analysis. The first wasthat before the formation of its ICT cluster, Oulu was not a center of the kind ofindustry – machinery, for example – on which ICT industries are normally based. In
other words, it presented initial conditions that would be comparatively easy tounderstand when analyzing the formative processes of industrial clusters. The second
reason was that Oulu clearly had ‚activity groups interested in forming a high-techindustrial cluster,‛ the presence of which is part of this paper’s definition of industrial
clusters. The third reason was that the level of labor mobility, and the possibility ofinterregional shifting of corporate headquarters and other facilities, was relatively low
in Finland.60 Oulu, therefore, was an appropriate case study for anyone wishing toanalyze the processes and mechanisms involved in the formatting of a high-tech cluster
under the most easily understandable conditions.
In Figure 3-6, major IT clusters in Europe and North America are organized according
to two considerations: on the horizontal axis, the degree to which there existed, prior to
the formation of the cluster, an industrial agglomeration of the kind capable of forminga base for IT industry; on the vertical axis, the degree of influence exerted by activity
groups on the formative process. Oulu is the only one of these IT clusters which
satisfies the three conditions set down in the paragraph above.
Oulu is a northern city even by Finnish standards, and though it is the capital of its
60

The comparison here is with the United States.

39

region of Northern Ostrobothnia, it can hardly be called an urban center in global
terms. Another matter of interest, therefore, is how a city and region of this sortmanaged to build an ICT cluster and acquire, within the global economy, an industrial
and technological centrality as a mecca of mobile communications technology.

Figure 3-6Classification of IT Clusters in Europe and North America

Degree of influence exerted by
activity groups on the formative
process
High (Sustained efforts by activity groups on
behalf of cluster formation)
Oulu (northern Finland)[→ ICT]
Austin (Texas, USA)[→ IT]

Shallow
Sophia Antipolis (Southern France)[(Research city) → IT, life science]
Silicon Valley (California, USA)[→ IT, biotechnology]

Neufchatel (Switzerland)[Watches → MEMS
Dortmund (Ruhr area, Germany)[Saar heavy industry zone → IT, electrical machinery]Dresden (Saxony, Germany)[Machinery industry → semiconductors, automobiles]
Grenoble (Rhône-Alpes region, France)
Degree to which[Electrical machinery, machinery,an agglomeration
chemicals→ IT, biotechnology]
of machinery
Deep industries, orother industries
capable offorming a basefor IT industry,
existed prior to
the formation of
the cluster
Low (Occurring spontaneously, even whenopportunities exist)

40

Chapter 4

Development of the Oulu ICT Cluster and Verification of the Working

Hypothesis

In this chapter I examine the background to the Oulu ICT cluster and broadly trace its
development over time. Keeping in mind the five formative processes discussed in
Chapter 3, I focus on the efforts of principal regional actors to promote each process
and the degree to which the processes moved forward as a result. Finally I verify myworking hypothesis on the formative mechanism of high-tech industrial clusters,
focusing on the five formative processes, causal correlations at work among theformative processes, and classification of the periods of foundation and development.
4.1 Oulu Before Development
Oulu’s path toward development as an ICT cluster began in earnest with the founding
in 1958 of the University of Oulu. Before examining that event, let us quickly survey
the major industries that existed prior to that time.61① The Founding of Oulu
Oulu was founded in 1605 by King Carl IX of Sweden. Facing the Gulf of Bothnia andthe Oulu River delta, it had long been a center of regional trade, and at the time of its
founding was the principal city of northern Finland. Its location at 65°01’ north latitude
places it less than 200 km from the Arctic Circle (66°33’). Oulu62 is a Finnish word, but
at the time of the city’s founding all of Finland was under the rule of the Swedes,63 whocalled it Ureaborg. But whatever its name, its wealth of resources earned it a reputationas ‚Stockholm’s storehouse.‛ Its economy was supported by a thriving export trade,most notably of salmon and other foodstuffs. A salmon features prominently on Oulu’s
Descriptions of historical facts in section 4.1 are based on material from the Oulu website(http://www.oulu.ouka.fi/) and Wikipedia homepage (http://en.wikipedia.org/wiki/Oulu).
62 In the Sami language, used in the northernmost areas of Finland, Sweden, and Norway andin Russia’s Kola Peninsula, ‚Oulu‛ is rooted in the word for ‚flood.‛ Located in the Oulu Riverdelta, the town is said to have been a center of trade for many centuries. (Based on material
from the Oulu website: http://www.ouka.fi/city/english)
63 Finns have lived permanently in Finland since about the 1 st century. With the establishment of
the border between Sweden and Russia in 1323, Finland became part of Sweden. In 1809,
Sweden ceded Finland to Russia, putting it under Czarist rule as an autonomous grand duchy.
Finland finally gained its independence in 1917 in the aftermath of World War I and the Russian
Revolution. The Republic of Finland was established in 1919.
61

41

coat of arms.
② Tar Exports and International Trade
The forests surrounding Oulu provided it with abundant lumber, the raw material fortar. Tar was one of Oulu’s chief exports from the 17th through the 19th century, as it wasused to coat the wooden ships produced at the time. It was such an important source of
foreign capital that it became known as the ‚black gold of the North.‛
In the plaza outside the Oulu city hall stands a superbly decorated lamppost, given in1886 to the Oulu Tar Makers’ Association by the Glasgow Chamber of Commerce andIndustry in appreciation of Oulu’s longstanding tar exports to the city.64 The advent ofsteel ships brought an end to the tar trade in the early years of the twentieth century.
The eighteenth and nineteenth centuries, however, were a time of expanding maritime
transport. Scheduled trade with Stockholm and Central Europe was thriving, firmly
establishing Oulu as a center of trade and an international city.
③ The Industrial Revolution and the Flourishing of the Lumber Industry
The Industrial Revolution began in Britain in the late eighteenth century, and by thestart of the nineteenth century its effects were being felt in northern Finland. That waswhen automotive vehicles came into general use, and the lumber industry, reaping thebenefits, began to flourish. Lumber exports continued until about 1930, after which
they gradually fell off. However, products made from the region’s abundant lumber
resources are important exports even today.
④ The First Industrial Miracle: Tanneries
In 1863, Karl Robert Åström opened a tannery which proceeded to develop into Oulu’s
first ‚industrial miracle‛ (the second being the ICT cluster). The firm achieved
enormous success exporting harnesses, straps and other leather goods to Imperial
Russia, Northern Europe and the Baltic countries. 65 Åström’s company, called
Weljekset Åström Oy in Finnish, was located need the city center. It was one of Oulu’s
largest export factories for over a century before finally closing its doors in 1974. In its
place now stands one of Finland’s three National Science Centers, with exhibits
designed for children and the general public.
64
65

Interview with Seppo Mäki.
Mika Kulju (2002), pp. 24-25.

42

⑤ The Appearance of Pulp and Paper Mills and Chemical Fertilizer Plants
In the 1930s, when Finland had been independent from Russia for over a decade, theopening of Oulu’s first paper and pulp mills signaled the birth of the city’s first majorindustry of the twentieth century. The British paper manufacturer Peter Dixon & Son
Ltd. opened the paper and pulp mill Toppila Oy in 1931 in the city’s Toppila district;
the Nokia affiliate Oulu Oy started another in 1937 in the Nuottasaari district.66 While
the former closed in 198067, the latter remains in operation today as a plant of the major
papermaking group Stora Enso Oy, turning out glossy paper and other high-quality
paper goods.
In the 1950s, a time of postwar reconstruction, Typpi Oy opened a chemical fertilizer
plant in Oulu’s Laalina district.68 The plant is run today by Kemira Chemicals Oy andmanufactures formic acid (used as a synthetic raw material in the production oforganic chemicals and in leather tanning) and hydrogen peroxide (for bleaching agentsand disinfectants), among other products.
⑥ Construction of Electric Cable Plants
In the 1960s, two firms constructed electric cable plants in Oulu: Northern Cable(Pohjolan Kaapeli Oy), a member of the Nokia group, and Tim Vilmin Kaapeli.69 The
former was a prelude to the transfer by Nokia of its entire wireless telephone divisionfrom the Helsinki region, in southern Finland, to Oulu. This plant later broke off fromthe Nokia group to become the nucleus of PKC Group Oy, a commissioned assemblerof wire harness and electronic devices which in 1997 became the Oulu region’s first
listed company.

Mika Kulju (2002), p. 24.
Interview with Seppo Mäki.
68 Mika Kulju (2002), p. 26.
69 Mika Kulju (2002), p. 27.
66
67

43

Figure 4-1

Map of Finland

Source: Virtual Finland website.
(http://virtual.finland.fi/netcomm/news/showarticle.asp?intNWSAID=27068

444.2 Summary of the Development of Oulu and the Oulu Region
In the following I summarize the development of the Oulu metropolitan area and the
Oulu ICT cluster, based on changes in population and the number of employed invarious industries in the city of Oulu and the Oulu region as a whole.
① Population Trends in Oulu City
Figure 4-2 shows long-term changes in the population of the city of Oulu. The city’s
population stayed relatively stable, at about 15,000, from the turn of the twentiethcentury until about 1920. Tar exports had already ended, and the city’s commercial life
centered on comparatively small-scale trade in lumber products and tanneries.

Figure 4-2

Long-term Population Changes in the City of Oulu

250

200

Population in thousand

150

Oulu city

100
Oulu Region(reference)

50

0

Year

Data for Figure 4-2
Year
Population

1900
14,174

1910
14,777

Year
Population

1970
87,244

1975
93,707

1920
15,1191930
18,287

1940
24,398

1950
37,4491960
53,0801965
78,270

1980
1985
1990
1995
2000
2005
93,454
97,200 100,350 106,448 117,670 127,213
Oulu region population (reference)
143,888 153,265 162,644 175,466 192,263 209,908
Note: The Oulu region includes, in addition to the city of Oulu, the following ten municipalities: Hailuoto,
Haukipudas, Kempele, Kiiminki, Liminka, Lumijoki, Muhos, Oulunsalo, Tyrnava, and Ylikiiminki.
Sources: Yearly editions of the Oulu City Statistical Yearbook (Oulun kaupungin tilastollinen vuosi-kirja); Statistics Finland.

From 1930 to 1950, a period encompassing World War II, the population increased from45

18,000 to 37,000; continued growth was seen in 1960 (53,000) and 1970 (87,000). The
increase in population during these years seems related to the dramatic rise of thepaper and pulp industry in the 1930s and the development of chemical fertilizer andelectric cable production in the 1950s and 1960s respectively. Growth was particularly
striking in the five years from 1960 to 1965, when the population rose 47.5% from25,000 to 78,000. The large number of new factories in operation, coupled with the
opening in 1958 of the University of Oulu, clearly set the stage for rapid population
growth.
This trend ended abruptly, however, when the population actually fell, from 93,707 to
93,454, over the five-year period from 1975 to 1980. Growth picked up again, although
gradually at first: The population reached the 100,000 mark in 1990 and has continued
growing at a quickening pace, to 106,000 in 1995, 117,000 in 2000, and 127,00070 in 2005.
Contributing factors included, in the late 1970s, declining employment in what had
been until then the leading manufacturing industries, and, in the 1990s, the region’s
growing ICT cluster. I would like to examine these trends in light of changes in thenumbers of people employed in different industries.
② Number of People Employed in the City of Oulu, by Industry
Figure 4-3 shows the number of people employed in various industries in the City ofOulu since 1975. From 1975 to 1980 there was almost no change, the number holding
steady at approximately 43,000. The number of manufacturing workers fell by 12,000,
but declines were greater in construction (down 18,000) and in wholesaling, retailing,
hotels, and restaurants (down 13,000). In the field of community, social, and welfare
services, however, employment grew by 28,000. It is unclear just why these changes
took place, but the big decline in manufacturing employment71 may have produced aspillover effect responsible for at least some of the declines seen in other industries.
The employment situation also played a role in the drop in the city of Oulu’s
population during this period.

With 128,000 people, Oulu is Finland’s sixth most populous city after Helsinki (562,000),
Espoo (232,000), Tampere (204,000), Vantaa (188,000), and Turku (174,000). (Helsinki, Espoo, andVantaa fall within the Helsinki metropolitan area. Population figures are as of June 2006.)
71 Parvo Simila, former director of the Economics Division of the Oulu City Government, said in
an interview that the downturn in employment, particularly in manufacturing, that took placein the late 1970s created a sense of crisis within the city government that ‚something had to be
done.‛
70

46

During the decade of the 1980s, the total working population grew by more than 5,000
to slightly less than 48,000; much of the growth derived from an increase of 3,657 in thefields of finance and real estate (including financial services, insurance, real estate,cleaning, and leasing). Employment also grew in community, social, and welfare
services (up 1,721) and wholesaling, retailing, hotels, and restaurants (up 834). Notably,
however, employment in the manufacturing industry fell throughout the 1980s, from
8,486 at the start of the decade to 7,728 at its close, a decline of 758 people. Althoughconstruction of the Oulu ICT cluster began during this period, it did not create enoughnew jobs to make up for those lost in the manufacturing industry.
Figure 4-3

Changes in Oulu City Employment, by Industry

Persons

60000

Community, social, welfare & related
services

50000

Financial services, insurance, realestate, cleaning, leasing

40000

Transportation, warehousing,telecommunications
Wholesaling, retailing, hotels,
restaurants

30000

Construction

20000
Electricity & water supply

10000

Manufacturing
Mining0Agriculture

Year

47

Data for Figure 4-3
1985
419
65
7,635
517
3,138
7,108
3,631
3,146
18,51944,178

1990
409
36
7,728
545
3,146
7,770
3,437
6,226
18,62347,920

1991
370
42
6,986
527
2,600
7,215
3,207
5,635
18,59345,175

1992
317
37
6,512
500
2,031
6,528
2,919
5,190
17,83341,867

1993
297
33
6,275
498
1,751
6,012
2,760
4,695
16,69339,014

1994
298
44
6,720
467
1,667
5,959
2,747
5,091
16,82039,813

1995
1996
1997
1998
1.
274
254
262
243
2.
46
60
62
65
3.
7,874
8,354
9,184
9,775
4.
452
439
418
433
5.
1,708
1,774
2,000
2,132
6.
6,032
6,227
6,480
7,210
7.
2,750
2,775
2,951
3,105
8.
4,986
5,288
5,574
6,299
9.
17,69018,515
19,29918,717
Total
41,812
43,686
46,23047,979Source: Statistics Finland
Notes: 1. Provisional figures
Notes: 2. Data for 1975, 1980 and 1985 are from Standard Industrial Classification 1988 (TOL 88).
Data for 1990 and afterward are from Standard Industrial Classification 2002 (TOL 2002).

1999
272
66
10,425
427
2,319
7,358
3,297
6,655
19,64850,467

2000
268
68
11,086
405
2,600
7,513
3,313
7,610
20,26553,128

2001
267
75
10,378
415
2,502
7,921
3,346
8,372
20,66653,942

2002
260
78
9,805
396
2,485
7,683
3,349
8,774
21,58554,415

2003*
229
82
9,650
388
2,643
7,933
3,382
9,097
22,34055,744

1.Agriculture
2.Mining
3.Manufacturing
4.Electricity & water supply
5.Construction
6.Wholesaling, retailing, hotels, restaurants
7.Transportation, warehousing, telecommunications
8.Financial services, insurance, real estate, cleaning, leasing

9.Community, social, welfare & related services
Total

1975
467
96
9,712
512
4,888
8,255
3,162
2,238
14,07043,400

1980
434
109
8,486
571
3,095
6,936
3,691
2,569
16,902
42,793The breakup of the Soviet Union cut sharply into Finland’s exports during the period
from 1990 through 1993, throwing the nation’s entire economy into a deep slump andcausing employment in Oulu to fall across the board, from 48,000 to 39,000. This wasfollowed by a period of dramatic growth through 2000 (to about 53,000); employment
continued to grow through 2003 (to about 56,000). During the ten years starting in 1993,
employment gains were seen in community, social, and welfare services (up 5,647),
financial services, insurance, real estate, cleaning, and leasing (up 4,402), andmanufacturing (up 3,375). To a great extent, growth in manufacturing – particularly inthe high-tech sector – is believed to have been the economy’s driving force throughout
this period. The real increase was largely achieved in third-sector industries including
corporate services.
Figure 4-4 analyzes the number of workers in the manufacturing industry according to
two groups: those in the managerial class (directors, managers, researchers and so on),and other workers. Employment has grown steadily in the managerial class.

48

Figure 4-4

Numbers of Employed in Oulu Manufacturing Industry (Managerial

Workers; Other Workers)

16000
14000

No. of persons

12000
10000

Managerial
workers

8000

Other workers

6000
4000
2000
0

Year

Data for Figure 4-4
Year
1960
Managerial workers 1,131
Other workers
5,207
Total
6,338

1962
1,228
5,659
6,887

1963
1,295
5,583
6,878

1964
1,330
5,678
7,008

1968
1,914
6,576
8,490

1969
1,963
6,834
8,797

1970
2,152
6,930
9,082

1971
2,108
6,477
8,585

1972
2,168
6,416
8,584

Unit: No. of persons
1973 1974
2,360 2,402
6,714 7,105
9,074 9,507

Year1975 1976 1977
Managerial workers 2,638 2,793 2,777
Other workers
7,497 7,655 7,447
Total
10,135 10,448 10,224

1978
2,796
6,999
9,795

1979 1980 1981 1982 1983
2,786 2,976 3,116 3,170 3,140
6,178 7,541 7,688 7,578 7,357
8,964 10,517 10,804 10,748 10,497

1984
3,072
6,898
9,970

1985
3,000
6,690
9,690

1986
3,127
6,342
9,469

1987
3,112
6,386
9,498

1988
3,484
6,279
9,763

Year
1990
Managerial workers 3,681
Other workers
6,115
Total
9,796

1993
3,234
4,770
8,004

1994
3,218
4,303
7,521

1961
1,183
5,583
6,766

1991
3,433
5,793
9,226

1992
3,182
5,188
8,370

1965
1,529
6,360
7,889

1995
3,277
4,678
7,955

1966
1,661
6,392
8,053

1967
1,628
6,459
8,087

1989
3,259
6,248
9,507

1996 1997 1998 1999 2000 2001 2002 2003
3,827 4,379 4,879 5,839 6,656 6,547 6,626 6,245
5,315 6,089 6,440 6,567 6,800 6,814 5,725 5,465
9,142 10,468 11,319 12,406 13,456 13,361 12,351 11,710

Sources: Oulu City Statistical Yearbook, Oulu City Economic Bureau

Employment growth was especially rapid from 1995 through 2000, the number of
employed rising by a yearly average of 15.2% from 3,277 to 6,656 persons. While thepace slowed somewhat from 2000 through 2003 (6,245), it remained over 6,000. The
dramatic rise in managerial-class employment appears to have owed a lot to anincrease in researchers and technicians. The number of ‚other workers,‛ meanwhile,having bottomed in 1994 at 4,303, rose to 6,814 in 2001; this still fell below the levels
achieved during the peak years of 1976 (7,655) and 1981 (7,688). The number increased
substantially, however, in 2003, to 5,465. The robustness of the research anddevelopment and technology sectors of Oulu’s manufacturing industry is evident fromthis analysis.
49

Figure 4-5 analyzes employment in Oulu’s manufacturing sector from 1982 to 1995
according to type of business. (Data were unobtainable in some instances.) The early
1980s saw a drop in employment, chiefly in the fields of machinery and metal products,
wood products, paper, and pulp, and printing. The overall trend stabilized later in thedecade, although the decline continued in the hundreds in the wood products, paper
and pulp, and printing industries. Employment in the machinery and metal products
industry was generally stable throughout this period but failed to show an increase.
Declines were seen in virtually every field from 1991 to 1994, resulting in an aggregate
loss of over 2,000 jobs. Machinery and metal products was the only industry thatposted gains, which were particularly dramatic from 1994 to 1995 ( 27.7%).

Figure 4-5

Industry-specific Employment in the Oulu Manufacturing Sector

16000
14000

Others

12000
Machinery and metal productmanufacture
Ceramics, earth and stone
manufacture
Chemical product manufacture(including rubber and plastic)
Wood products, paper and pulp
manufacture; printing
Textile manufacture

8000
6000
4000
2000

50

1995

1994

1993

1992

1990

1991(Notes:2)

Year

1989(Notes:1)

1988

1987

1986

1985

1984

1983

0
1982

No. of persons

10000

Food and tobacco products
manufacture

Data for Figure 4-5
Food and Textile
Wood
ChemicalCeramics, Machiner Other Total
tobacco manufact products,
product
earth and y andproducts ure
paper andmanufacture
stone
metal
manufact
pulp(including
manufact producture
manufacture; rubber andure
manufact
printing
plastic)
ure
1982
1,539
89
2,527
1,266
530
3,802
4,797
10,748
1983
1,484
92
2,457
1,243
569
3,390
4,652
10,497
1984
1,360
81
2,425
1,341
483
3,067
4,280
9,970
1985
1,405
81
2,224
1,321
470
3,009
4,189
9,690
1986
1,547
75
1,893
1,376
450
3,058
4,128
9,469
1987
1,605
0
1,992
1,428
488
2,903
3,985
9,498
1988
1,596
0
1,965
1,396
548
2,873
4,258
9,763
1989(Notes1)
1,569
0
1,648
1,338
586
2,889
4,640
9,780
1990
1,542
0
1,330
1,279
624
2,905
5,021
9,796
1991(Notes2)
1,549
0
1,213
1,260
504
2,583
4,700
9,226
1992
1,391
0
1,014
1,241
378
2,530
4,346
8,370
1993
1,290
0
918
1,074
341
2,579
4,381
8,004
1994
939
0
733
941
327
3,024
4,581
7,521
1995
835
9
1,382
1,017
232
3,862
4,480
7,955
Notes: 1. As data for 1989 were unavailable, averages of the 1988 and 1990 figures were used for the purpose of this chart.

Note2. As there were no clear data available for chemical product manufacture for 1991, an average of the1990 and 1992 figures was used for the purpose of this chart.

Source: Oulu City Statistical Yearbook.

③ Numbers of Unemployed in Oulu CityAs shown in Figure 4-6, the number of Oulu’s unemployed increased throughout thelate 1970s, the jobless rate reaching a peak of 10.7% in 1978. Job declines in the
manufacturing and construction sectors are thought to have been behind the trend. The
1980s brought an initial period of stabilization followed by a steep ascent beginning in
1991, the year of the collapse of the Soviet Union. The jobless rate climbed to a high of
22.7% in 1994. Although the development of the ICT cluster helped to usher in a periodof overall improvement, since the 1990s both the numbers of unemployed and thejobless rate have been markedly higher than they were during the 1980s.
Comparatively high levels of unemployment affected not only Oulu, but Finland as awhole, during these years. (See Figure 4-6. Oulu’s rates were 2% to 5% higher than the
average for Finland.) High unemployment casts a troubling shadow on the Finnish
economy, which since the mid-1990s has been notable for the success of its high-techindustries and high growth rates of real GDP.72

During the period from 1994 to 2000, Finland’s real GDP growth rate ranged between 3% and
6% - one of the highest rates in Europe. Thanks to the development of the ICT cluster, per capita
real GDP for the Oulu region surpassed that of Finland as a whole by 15.8%. (See Figure 4-12.)72

51

Trends in the Number of Unemployed and the Jobless Rate in Oulu City

20,000

25.0
20.0
15.0
10.0
5.0
0.0

15,00010,0005,000
0Jobless rate(%)

No. of unemployed

Figure 4-6

No. of unemployed in Oulu
City
Jobless rate for all of Finland(reference)
Jobless rate for Oulu City (%)

Year(Data for Figure 4-6)
No. of unemployed in Oulu City
Jobless rate for Oulu City (%)
Jobless rate for Finland (reference)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1,251 1,602 3,235 4,354 3,877 3,037 2,909 3,298 3,461 3,662 3,926 4,008 3,442 3,334 2,617 2,621
3.3 3.8
7.7 10.7
9.5
7.5
7 7.7 8.1 8.6 8.1 8.2
7 6.6 5.2 5.1
2.2 3.8
5.8
7.2
5.9
4.6 4.8 5.3 5.4 5.2 5.0 5.3 5.0 4.5 3.4 3.4

No. of unemployed in Oulu City
Jobless rate for Oulu City (%)
Jobless rate for Finland (reference)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
4,484 7,730 10,666 11,581 11,039 10,678 9,554 9,474 9,146 8,669 8,512 8,711 8,316 8,375 8,208
8.9 15.3 20.9 22.7 21.8 20.8 18.1 17.4 16.4 15.1 14.3 14.1 13.3 13.3 12.9
7.5 13.0 17.7 18.2 17.1 14.7 12.6 11.4 10.2 9.8 9.1 9.1 9.0 8.8 8.4

Source: Oulu City Statistical Yearbook, Oulu City Economic Bureau, Statistics Finland.

There are several reasons why the city of Oulu has a high unemployment ratecompared with the rate for Finland as a whole. For one thing, the nationwide figure isstrongly affected by the situation in populous southern Finland, which includes thecapital Helsinki and its environs. Figures for regions not in the South are worse – thatis, higher – than that for Finland as a whole. Another factor is the greater proportion ofyoung people in Oulu City’s population. 73 Since higher rates of joblessness areassociated with younger demographics74, the city’s relative youth pushes up its joblessrate proportionately. As one more reason, we can cite the ongoing influx into Oulu ofpeople from other municipalities, mainly in northern Finland, from the mid-1990s
onwards.75 These new arrivals, who have spurred the development of the ICT cluster,People between the ages of 15 and 24 accounted for 17.0% of Oulu City’s population, 4.5
percentage points higher than the figure for Finland as a whole (12.5%).
74 In 2004, the jobless rate for young Finns (between the ages of 15 and 24) was 20.8%, more than
twice the rate for all ages.
75 During the seven years from 1994 through 2000, the population of the city of Oulu increased
by 16,000. About 9,300 of this figure, however, represented a ‚social increase;‛ that is, the netincrease obtained by subtracting the number of people who had moved out of Oulu from thenumber of those who moved into the city from other regions or countries.
73

52

include a sizeable number of non-working spouses and other members of the newly
unemployed. Their presence appears to raise the jobless rate in proportion.76 These arejust a few of the contributing factors.77
Over the past forty years, Finland has become a welfare state whose policies haveprovided its citizens with a high level of welfare at a high cost. Finns enjoy freeeducation from kindergarten through university, health care at nominal cost at public
hospitals, ample retirement benefits and a well-working unemployment insurance
system.78 This welfare system appears to have functioned well, helping to maintainsocial stability in the face of a troubling income disparity which has widened since the1990s.79④ Unemployment in the Oulu Region, by Industry
This analysis has relied so far on data for the city of Oulu. The geographical limits of
the Oulu ICT cluster, however, extend to the city’s neighboring municipalities. The
analysis will now focus on data for the Oulu region, which includes Oulu City itself
and ten neighboring municipalities – Kempele, Oulunsalo, Hailuoto, Haukipudas,
Kiiminki, Liminka, Muhos, Tyrnävä, and Ylikiiminik – which, since 2000, have carriedout regional industrial policies in concert with Oulu City (see Figure 4-7).

For example, if a family moved to Oulu because one member found work in the city’s vicinity,
there was no guarantee that the person’s spouse or other dependent would also immediately
find work. The social increase in population would be accompanied by growth in the number of
newly unemployed persons like these, potentially pushing up the unemployment rate. (This isregarded as a real problem in the Oulu region. The Oulu Region Business Agency supports theestablishment of small businesses and carries out policies for that purpose.) Also in this regard,
the jobless rate for Finnish women differs is only a few percentage points from that for men. As
of April 2006, males accounted for 74.0% of the total number of unemployed in Finland (aged 15
to 64); females accounted for 69.5%.
77 An article by the Oulu City Government for the July 13, 2005 issue of Technology News said
that since Oulu was the largest city in northern Finland, some structural long-term
unemployment was natural in the region, but that the amount was a mere 2.5% of Oulu’s totallabor force. Unemployment, it added, was steadily declining.
78 Castells, Manuel and Pekka Himanen (2002), p. 12 of Japanese version.
79 According to Manuel Castells and Pekka Himanen (2002), Finland’s Gini coefficient (acoefficient which measures the inequality of income distribution) rose dramatically from 1990
(0.204) to 1998 (0.295), indicating a rise in inequality. Nevertheless, the incarceration rate, anindication of social exclusion, has fallen consistently since 1950 (per 100 thousand, the figure
was 187 in 1950, 69 in 1990, and 62 in 2000.)7653

Figure 4-7

The Oulu Region (11 Municipalities)

Source: Website of the Oulu Regional Business Agency(http://www.ouka.fi/ouluseutu/yrityspalvelut/suomi/intra_esitteet.htm)

Figure 4-8 shows transitions in employment in various industries (because of limited
availability of statistics, data start in 1990, or, in some cases, 1993). Between 1990 and
1993, total employment in the industries shown fell by a yearly average of 6.2%. Fromthat point to 2000, however, the figure rose steeply by an average of 4.4% per year.
Growth between 2000 and 2003 was somewhat slower at annual average of 1.9%. The
decline that took place between 1990 and 1993 was common to all industries. By
contrast, the rapid growth that characterized the period from 1993 through 2000
centered on manufacturing and on finance, insurance, cleaning and leasing, which
recorded average annual growth of 8.6% and 6.7% respectively. Manufacturing
employment peaked in 2000, posting an overall decline for the period from 2000 to
2003. Jobs in finance, insurance, cleaning and leasing grew during the same period by ayearly average of 6.6%. In community, social, and welfare services, employment grewby 3.6% annually on average. While the drop in manufacturing employment owes
something to labor intensity, the steady growth in employment in the service sector
appears to have been spurred by the momentum created by the opening of the ICT
cluster in the 1990s.

54

Figure 4-8

Trends in Employment in the Oulu Region, by Industry
Other

10000090000

Community, social, and welfare
services

No. of persons

80000
70000

Finance, insurance, real estate,cleaning, and leasing

60000

Transport, warehousing, andtelecommunications

50000

Wholesaling, retailing, hotels, andrestaurants

40000

Construction

30000
20000

Electric and water utilities

10000

Manufacturing0
MiningAgriculture

Year(Data for Figure 4-8)
1994
2237
157
10955
805
3268
8880
4434
7218
23451
1312
62717

1995
1989
142
12629
774
3353
9045
4460
7062
24612
1256
65322

1996
1902
138
13329
763
3486
9306
4484
7467
25920
1111
67906

1997
1998
1999
2000
2001
Agriculture
1834
1773
1776
1733
1653
Mining
158
161
168
166
172
Manufacturing14764 15729 16654 17918 16909
Electric and water utilities
757
769
772
740
699
Construction
3954
4259
4606
5139
5003
Wholesaling, retailing, hotels, and restaurants
9805 10797 11085 11329 11921
Transport, warehousing, and telecommunications
4764
5027
5284
5302
5372
Finance, insurance, real estate, cleaning, and leasing
7952
8844
9278 10504 11544
Community, social, and welfare services
26896 26471 27528 28499 29188
Other
1110
1045
1290
1246
1186
Total
71994 74875 78441 82576 83647
Source: Employment Statistics, Statistics Finland.
Notes: 1. Industrial classification is according to Standard Industrial Classification 2002 (TOL 2002).
Notes: 2. Data for 2003 are provisional.

2002
1575
166
16075
662
5067
11735
5427
12187
30560
1337
84791

2003*
1510
204
16097
640
5431
12120
5519
12725
31645
1541
87432

Agriculture
MiningManufacturing
Electric and water utilities
Construction
Wholesaling, retailing, hotels, and restaurants
Transport, warehousing, and telecommunications
Finance, insurance, real estate, cleaning, and leasing
Community, social, and welfare services
Other
Total

1990
2810
136
12373
965
5626
11353
5286
8435
25584
1543
74111

55

1991
2666
156
11086
947
4729
10692
4925
7761
25489
1530
69981

1992
2483
127
10348
909
3743
9762
4560
7255
24479
1500
65166

1993
2323
119
10038
851
3320
9014
4354
6691
23061
1299
61070

⑤ Numbers of Employed in High-tech Manufacturing in the Oulu Region
Figure 4-9 shows transitions in the number of persons employed in thosemanufacturing industries in the Oulu region that are counted as ‚high-tech‛ fields:
electronic components and telecommunications equipment manufacturing, precisionequipment manufacturing, office equipment and computer manufacturing, andpharmaceutical manufacturing. From 1993 to 2000, these industries as a wholeexperienced rapid growth in employment, the number of employed rising from 3,401
to 9,181 for an annual average of 15.2%. These figures support the view that the growth
in manufacturing employment as a whole during this period (up 7,880 persons, from
10,038 to 17,918) was driven by an increase in high-tech jobs. The greatest contribution
by far was made by electronic components and telecommunications equipment
manufacturing, where employment grew by 5,537 persons, from 2,744 to 8,281, for acontribution rate of 95.8%. The figure slipped somewhat from 2001 onward, a result of
the worldwide slump in the IT industry and redistribution of production centers;
nevertheless, it remained above pre-1998 levels.

Figure 4-9

Trends in the Number of Employed in High-tech Manufacturing in the

Oulu Region
10000
9000
8000
Precision instruments

7000

No. of perons

6000

Electronic components andtelecommunications equipment

5000

Office equipment and computers

4000
3000

Pharmaceuticals

2000
1000
0

Year

56

Unit: Persons(Data for Figure 4-9)
Pharmaceutical OfficeElectronic
Precisionsequipment and components andinstruments
Total
Year
computers
telecommunications equipment

266
85
1993
184
137
1994
157
157
1995
216
95
1996
228
81
1997
179
400
1998
164
122
1999
139
151
2000
127
125
2001
26
22
2002
2003
27
24
Source: Statistics Finland.
Notes: 1. Data for 2003 are provisional.

2,744
3,799
5,174
5,754
6,413
6,483
7,547
8,281
7,449
6,850
7,181

307
328
401
410
476
557
536
610
591
794
684

3,402
4,448
5,889
6,475
7,198
7,619
8,369
9,181
8,292
7,692
7,916

Notes: 2. Classified in accordance with Standard Industrial Classification 2002 (TOL 2002).

⑥ Numbers of Workplaces in the Oulu Region
Figure 4-10 shows that after hitting a low point in 1995, the number of workplaces in
the Oulu region rose consistently both up to and after the turn of the century. In the
manufacturing sector, the number rose 17.3% from 550 in 1993 to 645 in 2001. The
number of job holders rose 73.2% during the same period, from 10,348 in 1993 to 17,918
in 2000, indicating a substantial increase in the number of people employed at each
workplace. Behind the rising trend was the striking growth of Nokia, to be discussed
later in this paper, and the tendency of firms which established operating bases as
subcontractors for Nokia to expand their operations to include not only business aimed
at Nokia but also emigration and export to other regions.

57

Figure 4-10

Trends in the Number of Workplaces in the Oulu Region, by Industry

9,000

Other

8,000

Community, social, and welfare services

No. of workplaces

7,000
6,000

Finance, insurance, real estate, cleaning,
and leasing

5,000

Transport, warehousing, andtelecommunications

4,000

Wholesaling, retailing, hotels, andrestaurants

3,000

Construction

2,000Electric, gas, and water utilities

1,000
Manufacturing0
MiningAgriculture

Year(Data for Figure 4-10)
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

82

90

96

102

99

96

112

114

110

118

117

61

64

65

65

66

60

70

62

61

58

62

550

556

557

602

628

643

633

619

645

638

633

27

30

31

30

26

29

29

26

27

25

25

767

776

757

795

813

854

855

873

906

919

922

2,012

1,958

1,936

2,048

2,125

2,134

2134

2,126

2,148

2,166

2,191

628

628

620

651

690

688

700

733

729

724

746

1,145

1,142

1,188

1,256

1,341

1,376

1457

1,512

1,602

1,666

1,751

950

874

659

765

792

936

1007

1,207

1,252

1,211

1,371

Agriculture

MiningManufacturing

Electric, gas, and water
utilities
Construction

Wholesaling, retailing,
hotels, and restaurants
Transport, warehousing,and telecommunications
Finance, insurance, realestate, cleaning, andleasing
Community, social, andwelfare services
Other
55

44

54

23

31

30

26

26

27

25

29

6,277

6,162

5,963

6,337

6,611

6,846

7,023

7,298

7,507

7,550

7,847

Total
Source: Statistics Finland.

⑦ Sales Figures for Industries in the Oulu Region
Sales figures for industries in the Oulu region are shown in Figure 4-11. Having
climbed steadily from 1993 to 2000 – particularly for manufacturing in 1999 and 2000 –sales fell off in 2001 to the 1999 level, where they have stayed. The size of the increasein 2000 was so great that the subsequent margin of decline was all the more58

conspicuous. Still, recent levels have been twice that of 1995 or 1996 (about 10 billion
euro in total; somewhat less than 5 billion euro for the manufacturing sector).
Figure 4-11

Trends in Sales Figures in the Oulu Region, by Industry

14,000,000

Other

12,000,000

Community, social, and welfare
services
Finance, insurance, real estate,cleaning, and leasing
Transport, warehousing, andtelecommunications
Wholesaling, retailing, hotels, andrestaurants
Construction

Sales

10,000,000
8,000,000
6,000,000
4,000,000

Electric, gas, and water utilities

2,000,000

Manufacturing
Mining

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

0

Agriculture

Year(Data for Figure 4-11)
年
Agriculture

Unit: Thousand Euro

1993
13,647

1994
16,2401995
16,683

1996
19,267

1997
18,276

1998
46,701

1999

2000

45,17852,711

2001
45,073

2002
43,317

2003
49,034Mining
19,67016,12025,39330,073

41,69039,15839,88635,97262,44776,261

83,492

1,266,717

1,518,601

1,919,735

2,036,463

2,679,757

2,601,795

5,602,627

8,401,700

4,799,826

4,916,046

4,654,852

366,478

154,682

157,938

91,005

81,592

98,872

93,662

88,269119,316

136,400

139,808

347,816

347,995

397,898447,309555,377

614,143

708,609755,716

882,490743,714852,980

2,105,924

2,202,021

2,240,058

2,000,905

2,372,320

2,245,949

2,191,408

2,350,552

2,565,299

2,457,738

2,621,859

142,151

205,276

269,548

330,177

500,097545,395

516,318

613,266

609,020

606,705

709,433

186,011

199,848

227,010274,665

311,830

384,339447,216

568,488

656,192

759,166

809,212124,207

91,07588,58788,51789,850104,614

121,992

145,671

158,791

166,760

197,605

1,282

1,755

2,117

1,978

1,903

9,768,178 13,014,100

9,900,571

Manufacturing
Electric, gas, and water
utilities
Construction
Wholesaling, retailing,
hotels, and restaurants
Transport, warehousing,and telecommunications
Finance, insurance, realestate, cleaning, andCommunity, social, andwelfare services
Other
Total

2,563

2,704

2,350

1,409

2,051

2,221

4,575,184

4,754,562

5,345,200

5,319,790

6,652,840

6,683,187

9,908,085 10,120,178

Source: Statistics Finland.

⑧ Per-capita Added Value for Residents of the Oulu Region
Sales growth in the manufacturing and service industries, particularly those involving
high technology, was supported from the late 1990s to 2000 by strong growth in59

per-capita added value for residents of the Oulu region (Figure 4-12). In 2002, thefigure for Finland as a whole exceeded 15.8%, indicating how the ICT cluster has
contributed to the growth of the entire Oulu region.
Figure 4-12

Trends in Per-capita Added Value for Residents of the Oulu Region(2000 prices)
30,00025,000Euros

20,000
Oulu region

15,000Finland10,000
5,000
0
1995

1996

1997

1998

1999

2000

2001

2002

Year

(Data for Figure 4-12)
Year
1995
1996
1997
1998
1999
Oulu region
17,916
18,791
20,142
20,577
21,962Finland17,441
18,084
19,15420,024
20,687
Source: Oulu Region Business Agency (Oulu Region Quick Facts)
Notes: 1. Figures for 2002 are provisional.
Notes: 2. Data for Ylikiiminki are not included.

Unit: Euros

2000
24,812
21,841

2001
24,85322,0592002
26,04722,487

4.3 Moves Taken by Local Actors in the Forming of the Oulu ICT Cluster, by Decade
Following is a decade-by-decade analysis of the steps leading up to the ICT cluster’s
formation, focusing on the moves taken by local actors.
4.3.1 Principal Initiatives from 1958 through the 1970s① Founding of the University of Oulu and Its Department of Electrical Engineering
The University of Oulu was the first university in northern Finland and the second
general university in Finland as a whole. When it opened in 1958, it included schools of60

philosophy, engineering, and medicine, and, as associated facilities, the Northern
Finland Research Institute and Teacher Training Institute. According to Mika Kulju(2002), the idea of establishing a research institute for technology and economics innorthern Finland was proposed in 1949 a local politician, Pentti Kaitera. Fending off
criticism by those who favored locating the institute in the South, proponents, led bypeople who were themselves from the North, finally won approval after a vigorous
inducement campaign lasting almost ten years. Having come into being in large part
thanks to this determined effort, the University of Oulu has been strongly committed
from the start to the promotion of northern Finland. As will become clear later on, theUniversity of Oulu has been central to the Oulu ICT cluster in terms of both research
activity and training. Against this background, Pertti Huuskonen, current president ofTechnopolis Oyl, the firm which operates the Oulu Science Park, calls the university’s
establishment ‚the most logical regional policy taken in the last hundred years.‛80
Clearly it was a giant step forward in the development of the northern regions81, as
young people from the North had previously to move south if they wanted a higher
education.
Establishment of the Department of Electrical Engineering and installation of Juhani Oksman
as its head
The university’s School of Engineering was established at the school’s inception, while
the Department of Electrical Engineering 82 , which would play the central role inresearch and training for the ICT cluster, was founded in 1965 as the Department ofElectrical Engineers.83 At the outset the department focused on the training of electricalengineers for Northern Finland. Juhani Oksman 84 , a graduate of the Helsinki
University of Technology who was a researcher at Helsinki University’s radio
astronomy station and studied the ionosphere at an observatory in the Arctic town ofSodankylä, was invited to serve as both professor and department chair. Though bornin southern Finland, Dr. Oksman had strong ties with the North, having lived in the
Arctic town of Rovaniemi through high school in connection with his father’s work.

Mika Kulju (2002), p. 193.
In the following pages I describe how, for years after the university’s founding, graduates of
its Department of Electrical Engineering had to seek work in the South.
82 The department today is not only the largest in the Faculty of Engineering but in the
University of Oulu as a whole, with over 3,000 students and teachers combined.
83 The name was changed to the ‚Department of Electrical Engineering‛ in 1975 and to the‚Department of Electrical and Information Engineering‛ in 2002.
84 The description of Dr. Oksman was taken from Mika Kulju (2002), pp. 35-49.
80
81

61

His experiences in Rovaniemi, and the outlook85 he developed there, left him with astrong sense of mission regarding the economic development of northern Finland. In aspeech given in 1966 at a ceremony marking his installation as department chair, herevealed the importance he attached to the field of electronics and promptly changed
the goal of the department – which had been the training of electricians for northern
Finland – to reflect this interest. This, more than anything else, was the first step
towards the creation of a high-tech industrial cluster in Oulu.
Invitation of Professor Otala
In line with his focus on electronics, Dr. Oksman invited Matti Otala86 to teach at theschool. Dr. Otala was head of the wireless telecommunications department of Finland
Cable Factory, then a subordinate of Nokia. Mika Kulju (2002) describes Dr. Otala as a
gifted technician who built a vacuum-tube radio at the age of seven and a cathode ray
tube television at fifteen. Born in Oulu 87 , he worked at Helval, a television
manufacturer, after graduating from the Helsinki University of Technology. He thenjoined Finland Cable Factory, becoming a Nokia researcher when that firm wasabsorbed by Nokia in 1966. His having been born in Oulu was what brought him to theattention of Dr. Oksman, who invited him to join the University of Oulu as a professor
in charge of electronics research. Dr. Otala agreed on condition that he be allowed tocommute to work as a ‚suitcase professor.‛88 Not everyone at the university waspleased at this accommodation, but Dr. Oksman, as chair of the department, overrode
any opposition.
Dr. Otala officially began teaching at Oulu in 1968. As head of the Department ofApplied Electronics (now the Electronics Laboratory), he led research projects
incorporating the actual needs of the electronics industry. In the process, he developed
a keen interest in the future of the electronics industry in northern Finland. The
In an interview, Dr. Oksman said that his father was an artist who found work in Rovaniemi,
the capital of Finland’s northernmost state of Lapland, after losing his job in the South. Dr.
Oksman said he wanted to repay the region for the kindness his father had received in
Rovaniemi, which had needed workers to help rebuild after Soviet bombing. His father ’s
difficulty in maintaining employment sparked a keen interest in the problem of unemployment
in northern Finland, to the extent that he chose it as the topic for a high school research paper.
86 See Mika Kulju (2002), pp. 51-62, for information on Professor Otala.
87 According to Mika Kulju (2002), wartime air raids caused Dr. Otala’s mother to flee from
Helsinki to Oulu, where Dr. Otala was born. (Ibid., p.53).
88 The term is used for professors who stay in the vicinity of the university only when they haveclasses to teach.
85

62

professor himself89 describes how this came to be:
Dr. Oksman and I held sauna meetings at which we defined out shared goals.
We agreed to work to curb the outflow of people from northern Finland and topromote the region’s development. There would be no meaning in training
engineers in Oulu if they all moved to the South after finishing their studies.
The North needed industry and the jobs it would provide. We would consider
the field a blank slate and start working in areas where it would really make adifference.
Dr. Oksman and Dr. Otala coined the term EEI to refer to the electrical and electronics
industry. Through opinion articles, lectures, and other channels, Dr. Otala avowed thatwithin a few years, EEI in northern Finland would be in the position to provide
thousands of jobs.90 At first there were few who believed such predictions, but by 1975
some 2,000 jobs had been created and the professors were (narrowly) able to saveface.91
Dr. Otala was a key catalyst in getting the firm Kajaani, an important actor in theconstruction phase of the Oulu ICT cluster, to invest in the electronics industry. Locatedin a town of the same name about 180 km southeast of Oulu, Kajaani is a manufacturerof paper, pulp, and papermaking machinery. Dr. Otala’s ideas on the future of theelectronics industry drew the interest of Kajaani’s president, Mikko Tähtinen. In 1968,
after meeting Dr. Otala, an enthusiastic Mikko Tähtinen promptly launched Kajaani
Electronics (Kayaani Oy Elektroniikka).92 Its first products, measurement instruments forthe pulp bleaching process, were developed in cooperation with Dr. Otala’s researchlab. In later years the collaboration turned out a number of electronic products for use
in areas unrelated to papermaking. (More information on Kajaani is given later.)
In 1971 Dr. Otala was named chair of the department. In his acceptance speech, hepointed to information technology as a new and promising area deserving of theschool’s attention. This led to expanded research in IC and software and shows that of
Matti Otala, Uskalla olla visas (‚Dare to be smart‛), Ajatus Kirjat, Jyväsklä, 2001. Quoted from
Mika Kulji (2002), p. 56.
90 Dr. Oksman has said this estimate was for jobs mainly in the production sphere.
91 Interview with Dr. Oksman.
92 At the time of its establishment, the new company was given the name Jänkä Electronics (OyJänkä Electronics Ab), concealing its connection with Kajaani. (Mika Kulju (2002), p. 61.)
89

63

the three fields93 important to Nokia when it began to increase its research activity inOulu in 1985 – electronics, software, and wireless communications – the university had
already started taking steps to build up the first two. The department’s move into
telecommunications, meanwhile, started with research into radio waves conducted for
Dr. Okman’s Aurora project. A telecommunications lab was opened in 1973, leading to
the founding of the Center for Wireless Communication (CWC) in 1995.
In 1974, Dr. Otala was named the first director of the government-affiliated VTT
Technical Research Center of Finland (details on which are given later). He proved astrong leader in advancing the center’s practical research. By 1983, when he moved tothe elevator manufacturer Kone94, he was one of the most active visionaries involved in
the Oulu ICT cluster.

Transformation of the Electrical Engineering Department at the University of Oulu
With the contributions of Dr. Oksman and Dr. Otala, the Department of ElectricalEngineering underwent important changes over the course of its development. The
evolution of its research areas is traced in Figure 4-13.95
As mentioned earlier, the department’s original name was the Department of ElectricalEngineers. In reality, however, it provided a full range of courses that qualified it as anengineering department. At its start, the department included the Department of
Measurement Techniques, Department of Applied Electronics, and Department ofTheoretical Electrical Engineering.
The Department of Measurement Techniques was established as Dr. Oksman’s researchlab. It later added courses in photoelectrical engineering and is now known as the
Optoelectronics and Measurement Technology Laboratory.

Interview with the director of Tekes Oulu (Finnish Funding Agency for Technology andInnovation). Established in 1983 as an umbrella organization of the Finnish Ministry of Tradeand Industry, Tekes extends economic support for surveys, research and development in scienceand technology.
94 Dr. Otala went on to executive positions at Nokia and other leading Finnish companies.
95 I turned to the website of the University of Oulu Department of Electrical Engineering(http://www.ee.oulu.fi/) for much of the information I sought on the department. Other valuable
information was provided by Ilkka Heikura, public relations manager of the Department ofElectrical and Information Engineering, Engineering Faculty of the University of Oulu.
9364Figure 4-13

Evolution of Research Laboratories in the Department of ElectricalEngineering, Faculty of Engineering, the University of Oulu
1965

Early 1970s

Mid-1970s

Early 1980s

Late 1980s

Laboratory Department of Measurement Techniques(First professor: Juhani Oksman)Mid-1990s

Present

Optoelectronics andMeasurement Technology
Laboratory

Department of Applied
Electronics(First professor: Matti Otala)

Department of Electronics

Department ofTheoretical ElectricalEngineering (First
professor: Matti
Karras)Microelectronics and Material

1980
Computer Engineering Laboratory

Physics Laboratory(First professor: Pentti Leppänen)(First professor after split-off:Juha Röning)

1994
Information Processing
Laboratory (First professor:

1973（Radio researchlaboratory led by Dr.
Oksman）

Matti Pietikäinen)

Telecommunication(Cooperation in founding andLaboratory

operation)

1995 Center for WirelessCommunication (CWC) (First
director: Pentti Leppänen)Source: Interviews with Ilkka Heikura, public relations manager of the Department of Electrical and Information Engineering, Engineering Facultyof the University of Oulu.
Notes:1. In 1965, the time of its establishment, the department was called the Department of Electrical Engineers. In 1975 it became the Department
of Electrical Engineering, and in 2002 it was given its current name, the Department of Electrical and Info
Notes:2. In addition, the Department of Information Processing Science was created within the Faculty of Science. This department is now thesecond largest in the university (the largest is the Department of Electrical and Information Engineering).

Having begun as Dr. Otala’s research laboratory, the Department of Applied Electronics(now the Electronics Laboratory), went on to conduct broad-ranging practical researchthat included the cooperative project with Kajaani. With Seppo Leppävuori as acting
professor, the department worked with Aspo, a firm based in southern Finland, on thedevelopment of electronic circuitry utilizing thick film hybrid technology – a project
which contributed to the evolution of IC circuitry design in Oulu and mounting
technology for electronic parts.96 Dr. Leppävuori worked somewhat in the shadow of
his colleagues Drs. Oksman and Otala, but he played a vital role in the cluster’s
formative process in terms of technology, training, and strategy; it was he wrote theproposal to invite the government-affiliated VTT Electronics Research Laboratory to
Oulu.97
The very first graduate of the Department of Electrical Engineering, the earner of its
first doctorate, and the first of its graduates to become a professor, was Seppo
96
97

Interview with Jouko Möttönen, vice president of Polar Electro.
Mika Kulju (2002), p. 68.

65

Säynäjäkangas, a graduate of the Department of Applied Electronics. In 1977 Dr.
Säynäjäkangas founded what was to grow into the first global business to come out of
Oulu. This was Polar Electro Oy, a producer of wristband heart rate monitors forathletes such as cross-country skiers. By the early 1980s he was focusing all of hisenergies on the business. Even so, he retained for many years the title of Founding
Professor and served as a role model for entrepreneurs building start-ups from theproducts of university research.
The Department of Theoretical Electrical Engineering was led by the physicist Dr. Matti
Karras, who focused on using theoretical physics to delve deeper into the various
aspects of electrical engineering. The department later underwent of change of name tobecome the Microelectronics and Material Physics Laboratory. It dealt mainly with theminiaturization of IC circuitry, the downsizing of electronics components, and similar
issues from a materials standpoint.
In 1973 Dr. Oksman created a fourth laboratory, the Telecommunication Laboratory. Asa geophysicist specializing in the ionosphere, Dr. Oksman explored the field of radio
waves, focusing on spread spectrum technology. The technologies developed in thisfield were used in the production of military radar. But some promised to be applicableto civil telecommunications as well in products such as automobile phones and mobile
phones. The industrial community was quick to notice this potential, especially the
television manufacturer Salora, Nokia, and their shared subsidiary, Mobira, which saw
an excellent opportunity for Nokia to achieve global success in both mobile phones andbase systems. As a participant in academic conferences, Dr. Oksman was one of thefirst to recognize its future promise. In 1973 he opened the Telecommunication
Laboratory with the aim of pursuing research in this field. Playing an important role
here was Pentti Leppänen, who had worked with Dr. Oksman on ionosphere studies in
the Arctic town of Sodankylä.98 The Center for Wireless Communication, opened in
1995, cemented the university’s reputation as a mecca for telecommunications research.

A fifth laboratory, the Computer Engineering Laboratory, was established in 1980; abranch of this, the Information Processing Laboratory, opened in 1994 and continues inoperation today. As early as 1969 the Department of Information Processing Science99,
9899

Mika Kulju (2002), p. 46.
With a total of almost 2,000 students and teachers, this is now the second largest department

66

part of the Faculty of Science, was already offering courses in information processing.
However, the relatively early stage at which the Department of Electrical Engineering
introduced its computer engineering program seems to have had a lot to do with
Nokia’s move, starting in the late 1980s, to expand its research activity in Oulu.
The Department of Electrical Engineering has thus been concerned with more thanelectronics ever since its founding in 1965. It was a pioneer in introducing full-fledged
programs in telecommunications (particularly wireless communications) in 1973 and incomputer engineering in 1980. In 1978, Nokia chose it for the development of basestation systems for NMT. 100 The department has also been instrumental in thedevelopment of embedded software101 for mobile phones (since 1985) and, with thesupport of the Finnish Ministry of Defense, in the research and development of CDMA ,a third-generation mobile phone technology (since 1980).
Erkki Veikkolainen was a 1980 graduate of the Department of Electrical Engineering
who worked for private firms in the western part of Finland, at the VTT TechnicalResearch Center of Finland, and for Nokia Mobile Phone (now Nokia Mobira) as chiefof embedded software development. In the following paragraphs he describes the
University of Oulu’s early start the ICT field and how that influenced the decision to
invite Nokia to locate its research functions in Oulu.
Oulu was earlier than other regions to focus on information technology. When
Dr. Oksman joined the Department of Electrical Engineering at the Universityof Oulu’s Faculty of Engineering, he lost no time in shifting the focus fromelectrician training to electronics. Envisioning the future of microprocessors,
the university began introducing information technology programs as early as
the 1970s. It was quick to initiate change and flexible as to its content.
One reason for Mobira’s choice of Oulu as its center for (mobile phone)
software development was the leading-edge research in (embedded) software
being conducted at the University of Oulu and VTT Electronics. Oulu wasin the University of Oulu, exceeded only by the Department of Electrical and Information
Engineering.
100 Abbreviation for Nordic Mobile Telecommunication System. This was a first-generation
analog mobile phone system developed in 1981, principally in Sweden, Finland, and other
Scandinavian countries.
101 Microcomputer control software embedded in electronic components.

67

already the site of the most advanced work in Finland.102 Another attraction
was a talented workforce in the form of the university’s graduates. People
involved with the university worked hard to attract (the research functions of)
Mobira to the region. (Additions in parentheses are the author’s.)
In their selection of priority areas for research, Dr. Oksman and his colleagues
succeeded in drawing to Oulu the research functions of Nokia, thereby contributing inno small way to the region’s goal of promoting high-tech industry. In the environmentof the day, however, this was by no means an obvious choice. In fact, people who wereactually involved tend to emphasize the astuteness it required. One such is Jorma
Terentjeff, a 1974 graduate of the Engineering School’s Department of Applied
Electronics. Mr. Terentjeff served as plant manager and president of numerous
corporations before becoming CEO of JOT Automation, a prototypical electronics firm
originating in Oulu. (JOT was listed in 1998; in 2002 it merged with Elektrobit, another
Oulu-based company.) In Mr. Teretjeff’s words,
Oulu’s development would not have happened without the existence of the
University of Oulu’s Department of Engineering and the smart choices of those
who set its direction. Drs. Oksman and Otala acted wisely in rolling out
programs in wireless research and IC research at an early stage. In those days,
such courses of study were far from clearly cut.
Another view on the subject was voiced by Ilkka Heikura, a public relations manager,
graduate of the Department of Electrical and Information Engineering, and author of abook on the forty-year history of the Department of Electrical Engineering (Heikura,2005). Mr. Heikura spoke of the University of Oulu’s concentration on specific fields at
a time when Finland lagged behind the United States and other countries in electronics
research.
Drs. Oksman and Otala must be commended for initiating electronics researchat the University of Oulu at an early stage compared with other institutions inFinland. But more than that, they were astute in choosing which areas ofelectronics to focus on (information technology and telecommunication) at a
Research in embedded software was already going on at the Helsinki University ofTechnology; the question of which university was more advanced in this area would be difficult
to answer. (Interview with Erkki Veikkolainen)
102

68

time when Finland’s research in electronics technology was ten to twenty years
behind that of, for example, America or Japan. (Additions in parentheses are
the author’s.)
The events that sparked the formation of an ICT cluster in Oulu, a place unfamiliar
with high technology through the end of the 1950s, were the founding of the Universityof Oulu, the establishment of its Department of Electrical Engineering, and the choiceof priority research areas by Dr. Oksman, Dr. Otala and their colleagues in thedepartment.

Figure 4-14

Graduates of the University of Oulu Department of ElectricalEngineering, by Laboratory (1969-2005: 2,318 graduates in total)

Computer Engineering

32
101
217

Electronics

54

Information andTelecommunications

571

Optoelectronics and Measurement
Technology

259

Information Processing
Applied Physics, Semiconductor
Engineering and Material Physics

564

Raahe Campus

520
Other

Source: Ilkka Heikura (2005), pp. 200-254 (List of Graduates, Department of ElectricalEngineering, the University of Oulu).

② The VTT Electronics Research Laboratory: Inducement and Establishment
Another local actor with an important role in the Oulu ICT cluster is the VTTElectronics Research Laboratory, established in 1974 as part of the VTT Technical69

Research Center of Finland.103
The VTT Technical Research Center was created in 1942 within the Helsinki Universityof Technology to serve as a center for research in applied technologies. In addition totechnological R&D projects taken on for clients, the center pursues interim research
projects of its own choosing. At least one laboratory was established for each research
field. These are the six fields operating at present, with the number of researchers inparentheses: electronics (304), information technology (401), industrial systems (516),
processes(567),

biotechnology(290),

construction

andtransportation(425).

Laboratories are located in the Helsinki area (1,724 people, including 1,710 at the Espoo
headquarters, 11 in Nurmijärvi, and 3 in Helsinki); in Tampere (293); in Oulu (320,including 4 at nearby Raahe); in Turku (18); in Jyvaskyla (130); in Lappeenranta (12);and in Vaasa (6).
The VTT Electronics Research Laboratory was founded in Oulu in 1974. The decision tolocate the laboratory in Oulu was largely the result of a cooperative inducement effort
by Markku Mannerkoski, then president of the University of Oulu, and Pekka Jauho,
an Oulu native and director of the entire VTT complex since 1970. The inducement
proposal was written up by Seppo Leppävuori, then an acting professor at Dr. Otala’s
electronics research laboratory in Oulu. Although electronics was regarded as a growthfield at the time, it was still remarkable that VTT chose Oulu, and not the Helsinki area,
as the site of its new electronics laboratory. Jorma Lammasniemi, director of the VTTElectronics Research Laboratory, has this to say:In those days, it was quite exceptional for an institution like the VTTElectronics Research Laboratory to locate in Oulu – in Japan, it would besomething like locating a research facility for a groundbreaking field in
Sapporo, say, rather than Tokyo.104 What brought VTT Electronics to Oulu
were the individual actions of a number of people. There were people in Oulu
with the vision to see electronics as a growth field. I think there was a politicalelement as well, as people (in the central government) were interested inpromoting regional development. (Additions in parentheses are the author’s.)

Sections on the VTT Electronics Research Laboratory are based on information found on the
VTT website (http://www.vtt.fi/) and Mika Kulju (2002), pp. 63-74.
104 Dr. Lammasniemi had visited Hokkaido on business.
10370

Mika Kulju (2002) says that the effort to bring VTT Electronics Research Laboratory to
Oulu involved a large number of local individuals, including President Mannerkoski,
parliamentarians, and members of local government. It helped that regional
development policy was a priority of the central government at the time. The
Development Region Law, for example, provided that financial subsidies be given tocompanies locating in a designated ‚development region.‛105 Oulu did not, however,depend solely on government largesse. Just as the University of Oulu was among thefirst to do electronics research, Oulu succeeded in attracting VTT Electronics through a
mixture of vision and strategy. Juha Röning, the current dean of the University of
Oulu’s Department of Electrical and Information Engineering, believes that thepresence of electronics researchers at the university was a factor in VTT’s decision tolocate its electronics laboratory in Oulu:
VTT chose Oulu for the Electronics Research Laboratory because of the large
number of (electronics) researchers working at the university there. Kajaani,
which also had an industrial conglomeration at the time, was also being
considered, but Oulu was chosen because of the university. (Addition inparentheses is the author’s, taken from the context.)
Dr. Otala, the first director of the VTT Electronics Research Laboratory, proved to be apotent leader. Having gone from being head of Nokia’s wireless telephone division toserving as the University of Oulu’s first professor of electronic engineering, he valued
the practical in both research and education and assigned his students research projects
that reflected industry’s actual needs. While his approach sparked debate at theuniversity106, once he was installed as director of VTT, an institution devoted to appliedresearch, he pursued it as a matter of course. According to Mika Kulju (2002), people at
VTT headquarters regarded Dr. Otala’s methods as revolutionary, and they provoked
considerable controversy there.107 Eero Timonen, head of operations development at
VTT Electronics, tells how Dr. Otala, as director, focused on applied research insupport of private business, and how that resulted in the expansion of the VTTElectronics Research Laboratory.
Dr. Otala played a vital role as (the first) director of the VTT Electronics
Such regions were located in northern and eastern Finland, among other areas.
Interview with Dr. Oksman.
107 Ibid., p.69.
105
106

71

Research Laboratory. He taught the importance of working closely with firms
in the private sector. Their budget was small in the beginning, but as they
performed more and more of what we might call pro-business productdevelopment, the greater became their usable budget. Larger government(institutional) budgets had something to do with this. A significant factor was
the decision by Tekes108 (established in 1983) to supply funds for research anddevelopment in applied science under its policy to promote tie-ups between
industry and academia. As Tekes saw microelectronics and software as
particularly important fields, the VTT electronics lab received (relatively
generous) financing. (Additions in parentheses are the author’s.)
Dr. Otala left the laboratory in 1983 for a position at Kone, an elevator manufacturer insouthern Finland. But it seems clear that the institution’s subsequent development,
including that of its research funds, owes a great deal to his management policy whileat the helm. And, as the University of Oulu had been quick to choose priority fields forresearch, the VTT Electronics Research Laboratory was quicker than Helsinki todesignate certain research areas as significant. This says something about the strategic
astuteness of the laboratory’s leaders. Dr. Lammasniemi, director of the laboratory
since 1983, says the following about the VTT Electronics Research Laboratory’s being
earlier than Helsinki to initiate research in a number of important fields since the 1970s.
A reciprocal relationship existed between the VTT Information Technology
Laboratory in Helsinki (Espoo) and the electronics research laboratory in Oulu.
Research (in Oulu) on subjects such as microprocessor technology, application
software, and digital electronics began in the 1970s; Helsinki later took up thesesame subjects. In 1994 there was a reorganization within VTT; some functionsof the electronics laboratory were moved to Helsinki, while the headquarters
remained in Oulu. It was Oulu’s early specialization in electronics, I believe,
which enabled this to occur. When an institution moves quickly into a new
field, it builds its store of know-how and achieves real growth – even whenlocated in an outlying region. Therefore, while similar activities were being
pursued in, for instance, the capital area, Oulu had the qualities that enabled it
to become a key location for the field. For those times, it was a brave decision
The Finnish Funding Agency for Technology and Innovation. A government agency
affiliated with the Finnish Ministry of Trade and Industry, it extends economic support tosurveys and research and development, primarily in science and technology.
10872

on Oulu’s part, and by no means a natural or self-evident one. (Addition inparentheses is the author’s.)
Dr. Oksman comments on the fine strategic sense displayed by the VTT Electronics
Research Laboratory:
By skillfully introducing, say, automation (mechatronics) into its range of
disciplines (in the early 1980s), VTT Electronics came out on top in the
territorial competition between it and the VTT Information Technology
Research Laboratory in Helsinki (Espoo). (Additions in parentheses are theauthor’s.)
The 1970s saw VTT Electronics begin joint research with the University of Oulu andelectronics firms on PCB mounting technology; programs were launched inmechatronics in 1982 and embedded software in 1983. The introduction of these
peripheral disciplines led to the institution’s successful effort to induce Aspo,
headquartered in southern Finland, to expand its research and development andproduction activities in the Oulu area. (Aspo established itself in Oulu through a
subsidiary in 1972; the Oulu plant was enlarged in 1980.) It was also instrumental ingetting Nokia to locate its mobile telephone software division in the region.109
In the 1980s, VTT Electronics saw it as its mission to offer support to start-up firms andexisting companies venturing into new fields. Partly as a result of this policy, which
was the institution’s official one at the time (see the interview below), well over threehundred VTT employees left for jobs in the private sector or started companies of theirown. Dr. Lammasniemi, the laboratory’s director110, and Eero Timonen111 , head of

VTT does not make a policy of benefiting only those companies located in the vicinity of its
laboratories. In the words of Dr. Lammasniemi, VTT Electronics’ director, ‚(The VTT Electronics
Laboratory) has always collaborated not only with companies located in Oulu, but with firms in
Helsinki and indeed with foreign firms and universities. In the early days, in fact, almost all of
our research partners were in Helsinki. It was precisely for this reason that we were able toacquire as much know-how as we have and to use it to benefit local firms.‛ This point is
especially significant. It suggests that if events had merely been left to take their course,
collaboration with local firms would not have developed as it did, and that conscious
cooperation on the part of laboratory members can work to draw in firms from outside theregion. In this sense, the existence of the ‚activity groups‛ I refer to in this paper, and theunofficial networks that support them, may indeed be of importance.
110 Joined VTT in 1983; assigned to Oulu in 1978; director of VTT Electronics Research
10973

operations development, comment on the situation at the time.
Dr. Lammasniemi:
During the 1980s, it was the laboratory’s official policy to give support tostart-up firms. Actually we helped out not only start-ups, but also existing
firms which were trying to move into new fields of business. Dr. Veikkolainen,
who moved from VTT Electronics to Nokia, collaborated with Nokia on
embedded software research while he was at VTT; (after leaving VTT in 1985)
he then became Nokia’s R&D manager (in Oulu; for mobile telephoneembedded software). (Additions in parentheses are the author’s.)
Mr. Timonen:
Many people who leave the VTT Electronics Research Laboratory go on to
found their own companies or find work with private firms. More than ahundred people have done so over the past five years. In total, some 350 people
who trained at this institution and emerged as experienced research anddevelopment professionals have moved on to local companies (including
start-up firms). These people were not laid off by VTT, but left on their own
volition. (Additions in parentheses are the author’s.)
Today, the VTT Electronics Research Laboratory is a large establishment with aworkforce of over three hundred. Some private firms have voiced criticisms 112
regarding the cost of commissioned research, for example, or the speed with which it isdone. But it is clear that VTT, at least during the period from its founding in 1974 up to
through the 1980s, has played a vital role in the Oulu region,.

③ Initiatives Taken by Oulu Polytechnic (formerly the Institute of Technology)
Oulu Polytechnic113 is a higher-learning institution founded in 1996. It was born out of
the amalgamation of a number of schools specializing in vocational training, including

Laboratory since 1983.
111 Joined VTT Electronics Research Laboratory in 1982.
112 I did hear such opinions during my interviews.
113 In researching Oulu Polytechnic I drew information from the school’s website(http://www.oamk.fi/). In 2006 the school’s name was changed to the University of Oulu of
Applied Sciences.

74the Oulu Institute of Technology, the Raahe Institute of Technology and Business114,
Oulu Business College, and several nursing schools, under the aegis of the Oulu
Region Joint Authority for Vocational Education 115 . The student body currently
numbers 7,700 and includes 1,200 adults from the workforce. Oulu’s history ofengineering education is a long one, dating back to 1894 when Finland was under therule of Tsarist Russia. The school established at that time, while regarded as having
paved the way for today’s Institute of Technology, actually focused on training
technicians rather than engineers. In 1960, two years after the University of Oulu
opened its doors, the older school was upgraded into the Institute of Technology as a
training institution for engineers. The first courses concentrated on the training of civiland electrical engineers. In 1960 the student population numbered 400; by 1965 it hadrisen to 800 and currently stands at 2,200.
The Institute of Technology built up its programs roughly simultaneously with, or at
the most three to four years later than, the University of Oulu: In 1968, three years after
the university established its Department of Electrical Engineers, the Institute ofTechnology completed work on a new school building and added a Department of
Mechanical Engineering. In 1973, the Institute expanded the telecommunications
program in its existing training course for electrical engineers (Department of ElectricalEngineering); in 1984, it further enlarged its Department of Electrical Engineering toinclude a formal course in information technology.116 While both institutions wereschools of higher learning engaged in the training of professional engineers, theydiffered in important ways: The University of Oulu put greater emphasis on theoreticalresearch and study, as befitted a school engaged in the training of academics, while theInstitute of Technology leaned toward functional education and the training ofhands-on practitioners. Moreover, the minimum program at the Institute was, at four
years, one year shorter than the five-year minimum at the university. Of the 2,200
students at the Institute of Technology today, 700 are with the Department of Electrical

A school of technology and related subjects, located in Raahe, a city on the Gulf of Bosnia, 75
km southwest of Oulu.
115 A vocational training institution founded in 1994 with the assistance of the city of Oulu andsurrounding communities, including Haukipudas, Ii, Kempele, Kiiminki, Kuivaniemi, Liminka,
Muhos, Oulunsalo, and Ilii Ii (Raahe and Oulainen joined later). In addition to the higher
learning institution that is Oulu Polytechnic, the institute includes the Oulu Vocational College,
a 5,000-student vocational school on the high-school level.
116 Jorma Keinänen (a professor at the former Institute of Technology), personal communication,
April 24, 2006.
114

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Engineering117 specializing in some aspect of ICT. The Raahe Institute of Technology(now the Raahe Institute of Technology and Business), located some 75 km from Oulu,
is now affiliated with Oulu Polytechnic. It has specialized in information technology
since its creation in 1972, and indeed was one of the first schools to do so.118 Graduates
have gone on to work in ICT firms in Oulu as well as in Raahe. In fact, for some years
after the school’s establishment it supplied IT professionals to southern Finland as well.
There were 600 students enrolled in Raahe’s engineering programs at the time of thiswriting.
The Oulu Institute of Technology played an important role in the 1980s, a period ofburgeoning activity for Oulu’s ICT enterprises, by offering retraining programs forworking professionals, particularly in the new field of wireless communications. In theworld of high technology, the spotlight tends to fall on top research universities such as
the University of Oulu. But just as a diverse range of companies is needed to create ahealthy ‚industrial ecology,‛ a region needs professionals in many practical fields inorder to have an adequate mix of technological resources. For an educational
institution to have consistently provided such hands-on professionals, and to havemade it its mission to do so, is thus of great significance. Lauri Lantto, president ofOulu Polytechnic and a graduate of the University of Oulu, has this to say about thepart played by the Institute of Technology in training wireless telecommunications
professionals during the 1980s.
Degree courses for working students, and short courses for specialists, were
offered by Oulu Polytechnic (the Institute of Technology) from way back in theschool’s history. During the 1980s and beyond, the Polytechnic played a keyrole in reeducating working technicians for the mobile telecommunicationsindustry. New companies were being founded in growing numbers, and theyneeded people fluent in the latest technologies. The University of Oulu, I
In the Degree Program in Information Technology and Telecommunications.
The Raahe Institute of Technology began as a practical training institution replacing ateacher training school which closed in 1971. A committee formed by the Education Minister at
the time, had discussed the qualities which the new institution should have. At the strong
urging of Yrjö Kilpi, a mathematician at the University of Oulu and the committee’s deputy
chairman, it was decided that the Raahe Institute would specialize in telecommunications. This
was Finland’s first institution with such a mission. Dr. Otala and others from the University ofOulu assisted in preparing the school’s first-year syllabus. Dr. Kilpi went on to serve for many
years as chairman of the Institute’s board of directors. (Professor Jorma Keinänen of the former
Institute of Technology, personal communication, May 15, 2006)
117
118

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believe, also offered courses for working students 119 , but it was Oulu
Polytechnic that filled the need for practical retraining.
Graduates of the Polytechnic are adventurous, innovative, willing to take risks– more so, I think, than graduates of the University of Oulu (though they may
not be as strong in theoretical knowledge). These are qualities prized by small
and medium-sized firms. (Additions in parentheses are the author’s.)
In a number of ways, therefore, the Institute of Technology has worked in tandem with
the University of Oulu in helping to form Oulu’s ICT cluster. The number of its
graduates 120 reflects its standing as one of cluster’s important local actors. Oulu
Polytechnic’s president, Dr. Lantto, tells how the school has supplied Nokia with
employees:
Nokia employs 4,000 people in the Oulu region alone. Most of them work indevelopment and design, and relatively few in production. The University ofOulu and the Polytechnic supply roughly equal numbers of these employees,
though University graduates may be slightly more numerous. In 2004, the 400
or so graduates of the Polytechnic’s Institute of Technology found work indiverse fields including civil engineering, mechanical engineering, andelectronics. In the latter half of the 1990s (when Nokia was enjoying its highest
growth), two-thirds of our graduates were hired by Nokia or other companies
in the ICT sector. (Addition in parentheses is the author’s.)
As the above shows, the Institute of Technology and Oulu Polytechnic as a whole haveplayed a huge role in training talented workers for the Oulu ICT cluster.

④ Corporate Moves – Electronics Firms in Northern Finland Around the Time of the
University of Oulu’s Opening
There seem to have been few notable electronics firms in the city of Oulu for someyears after the university opened its doors. According to Mika Karju (2002), the only
such firms then in northern Finland were a telephone cable factory run by the Swedish
The University of Oulu created a Department of Continuing Education in 1981.
Currently, both the University of Oulu (Faculty of Engineering) and Oulu Polytechnic(Institute of Technology) have incoming freshman classes of approximately 600.
119
120

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company L.M. Ericsson Ab, based 75 km southeast of Oulu in Raahe, and Salcomp Oy,
a subsidiary of the television manufacturer Salora Oy, located in Kemijärvi in the polar
region of Lapland. What drew both firms to northern Finland were the low labor costs
that prevailed at the time. (It is worth noting that the former plant closed without everbeing used for development purposes. The latter managed to remain viable thanks to
new business development and productivity improvements initiated by Jorma
Terentjeff, its director from 1979 to 1983. Responding to a downsizing order from thecompany’s headquarters in the southern city of Salo, Mr Terentjeff, who later served as
COE of JOT Automation, fully utilized the network of contacts he and his colleagues
had developed while at the University of Oulu’s Department of Electrical Engineering
to carry out necessary improvements.121 The company remains in operation today.)Both of the firms discussed above were fundamentally production plants. It took until
the late 1960s, when the university’s Department of Electric Engineers had been
established and industrial-academic partnerships were under way, before facilities
appeared around Oulu that functioned as the ‚home bases‛ of electronics firms. In
1968 the papermaker Kajaani, influenced by Dr. Otala, set up a firm in Oulu to engage
in electronics research and development. The new firm was called Janka Electronics
rather than any variant of Kajaani. Two years later, in 1970, Kajaani officiallyestablished an internal electronics division, Kayaani Oy Elektroniikka, and moved its
operations back to the city of that name. Despite its leaving Oulu, the company kept inclose contact with the University of Oulu. Kajaani’s first venture into the electronics
field involved the development of measurement equipment for the pulp bleachingprocess, a product of joint research with Dr. Otala’s research lab at the university; later
achievements, however, included products such as fare meters for taxis, cash registers,
and acoustic consoles for broadcasting stations, none of which had any directconnection to control systems for the papermaking process. 122 Although Kajaani
withdrew from the electronics field in the early 1980s, its business involving processcontrol systems is carried on by Metso Automation Oy, an affiliate of Metso
Corporation, through the firm Valmet Oy. (Headquartered in Finland, Metso
Corporation is the world’s largest manufacturer of papermaking machinery.) It
currently has facilities in both Kajaani and Oulu. A key source of competitive strength
for this global firm is its electronics division, established by Kajaani in cooperation
Interview with Jorma Terentjeff.
Mr. Jarmo Koskinen of Metso Corporation, personal communication, April 11 and June 14,
2006.
121
122

78

with the University of Oulu. It is worth noting that the achievements of the university’sbusiness-academic partnerships in electronics were put to use not in the electronic andelectric machinery industries per se, but in the production of control systems forpapermaking, an existing industry in northern Finland, in a move that was
instrumental in sparking that industry’s world-class development. In 1983, Edacom Oy,
headquartered in Kajaani and with facilities in Oulu, took over the funds-collection
equipment division 123 of Kajaani’s electronics business. In 1986 the division cameunder the control of Bascom Oy (headquartered in Oulu), which was created out of
Bascom through an MBO.

In 1992, Bascom designed the world’s first fare-collection

system for public transport based on IC cards using radio frequency identification(RFID). Introduced first in Oulu, it is now in use throughout the world. The firm
remains a distinctive member of the region’s industrial community.124 According to
Veikko Huttunen, who directed the production of acoustic benches for broadcast
stations at Kajaani, that division was taken over by Jutel Oy in 1984 and continues
today as an exporter of radio broadcasting system solutions using digital technology.125
In the early 1970s, Aspo, a petroleum and coal company located in southern Finland,
entered the electronics field. Through contacts with Seppo Leppävuori of theElectronics Laboratory at the University of Oulu’s Electrical Engineering Department(then the Department of Electrical Engineers), the company set up a subsidiary,Paramic Oy, in Oulu.126 That firm worked with Dr. Leppävuori in the development ofelectronic circuitry using thick film hybrid technology, opening a factory in Oulu which
later became Aspocamp Oy.
Joint research and other cooperative endeavors thus contributed to the establishment ofelectronics companies in and around the city of Oulu following the opening of the
Department of Electrical Engineers. But it was Nokia’s transfer of its cellular phonedivision to Oulu that – considered in light of Nokia’s subsequent business developmentin the region – really had an impact on Oulu’s future.
A descendant of Social Automation Oy, this business was established in 1973 as a division ofEurodata Oy and is currently located in the Oulu region; it was bought out by Kajaani in 1977.
(Oinas-Kukkonen et al. (2006), pp. 11, 14.)124 Since 1988, Bascom has received investment from Polar Electro and has functioned as amember of that corporate group.
125 Jutel Oy has received large-scale investment from Polar Electro since the 1980s.
126 Interview with Jouko Möttönen, currently vice president of Polar Electro, who started
working for Aspo (and its subsidiary Paramic) during his student days at the University of
Oulu.
123

79

Nokia’s cellular phone division and the appearance of Lauri Kuokkanen
Nokia today is among the world’s top ten companies in terms of assets, a global
colossus manufacturing cellular phones, base stations, digital switching systems andmuch more. That Finland, with a population just above five million, could produce
such a mammoth enterprise is astonishing in itself. As is well known, Nokia hadmodest beginnings as a maker of paper, rubber, and electric cable.
Nokia was the name of a paper and pulp plant established in 1865. It was 1967,
however, before the firm joined with Finnish Rubber Works, a rubber bootmanufacturer founded in 1898, and Finnish Cable Works, founded in 1912, to form the
Nokia Group.127
In 1960, an affiliated firm, Finnish Cable Factory, entered the electronics field, marking
the start of Nokia’s involvement with electronics. Nokia’s first move into Oulu came inthe same year with the opening of an electrical cable plant by a Finland Cable Factory
affiliate, Northern Cable. The plant grew steadily, employing about a thousand people
by 1970, but it had no connection with electronics.
Finnish Cable Works, which entered the electronics field in 1960, was a developer andmanufacturer of computer terminals and wireless telephone systems; the director of its
cellular phone division in the mid-1960s was Matti Otala, prior to his move to the
University of Oulu. Dr. Otala was succeeded by Lauri Kuokkanen, a developer ofcellular phone filters and an important figure in Nokia’s development who later started
his own firm, Lauri Kuokkanen Oy. Nokia bought Finnish Cable Works in 1966 and, in
1967, the Nokia Group was born. (Nokia’s electronics division then had a total of 460
employees.)
In 1973 Nokia moved its entire cellular phone division, including factories, to Oulu’s
Rusko district. Oulu was not new territory for Nokia as it already had an electricalcable plant there. At the same time, in those days it was hardly to be expected that thecompany would make Oulu its home base for cellular phones. Lauri Kuakkonen, thechief of the cellular phone division at the time, speaks of his surprise at Nokia’s moveto Oulu.
Entries on Nokia are based on information obtained from the company’s website(http://www.nokia.com/A4126375) and Mika Kulju (2002), pp. 75-91.
127

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The cellular phone division moved to Oulu in the winter of 1973. Almost
twenty people came up from the South, and many more were hired fromaround Oulu. I think the main reason for the move was the presence of athousand-person electrical cable plant in the city. Kirk Wikstedt, the presidentof Nokia Electronics at the time, and I were talking in a hallway. We decided
then and there to move the cellular phone division to a developing region in
the North or the East. I had imagined someplace like Karelia, in the East (nearMr. Kuokkanen’s birthplace, Sortavala128). But I later learned that the decision
had already been taken to move to Oulu, in the North. I was told that Oulu was
the only possible choice. Only a few people seem to have been responsible forthis decision, and I can’t imagine that a great deal of research went into it. Björn
Westerlund was president of the Nokia group in those days (time in office:
1967-1977), and the fact that his family had its roots in Oulu may have hadsomething to do with it. I also heard that there had been some politicalpressure from the President (Urho Kekkonen, who served from 1956 to 1981).
For Oulu, it was like winning the lottery. I don’t think Oulu had the necessary
preparations in place at the time. If (the cellular phone division of) Nokia
hadn’t chosen to move there, Oulu would have had a vastly different future.
Mind you, there are regions that have attracted important companies only to
see them withdraw; Raahe and Ericsson come to mind. (Oulu, therefore, may
well

have

had

what

Nokia

needed

to

stay

in

business

there.)(Additions in parentheses are the author’s.)
Considering the developments made in priority research fields by the university’s
Department of Electrical Engineers, and the massive efforts made by Dr. Oksman, Dr.
Otala and their colleagues, Mr. Kuokkanen’s assessment of Oulu seems a trifle severe.
In 1973 the university had begun its research in electronics, information technology,
and wireless telecommunications, but there was as yet no VTT Electronics ResearchLaboratory – it was just about to open – and the only component of an‚electronics-based industrial conglomeration‛ was one Aspo subsidiary. Consideredfrom this perspective, Mr. Kuokkanen’s impressions seem only natural for someone
who had previously had no connection with Oulu. Indeed, much that he said wasvalid.
Because Finland recognized the Soviet Union’s sovereignty over Karelia under the peace
treaty of 1947, this area is now the Russian Republic of Karelia.
128

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In this paper, however, I take the view that it was a positive strategy taken by Oulu
itself129 – involving the active solicitation of major enterprises such as Nokia’s cellular
phone division and the VTT Electronics Research Laboratory – that caused good luck
to translate into industrial development and the formation of a regional ICT cluster. In
other words, I believe that not only was Oulu ‚saved‛ by Nokia’s move, but that the
Oulu region, through its strategic efforts, contributed in no small way to Nokia’s
growth.
In 1976, Nokia expanded the range of products manufactured at the Rusko plant byadding modems and PCM equipment130 to the items handled there. By 1978 the plant
employed 330 people and had grown into a major production site in Finland’s
electronics sector. Later, although Nokia moved the home base of its mobile phonedivision (handsets) to Salo as a firm named Mobira – a 1979 joint venture with Salora,
which was based in Salo – Oulu developed as a center of base station production.
Development of analog networks for NMT base stations began in 1979 at the Rusko
plant, with production following a few years later. When Nokia took its base stations
into the global market in the mid-1980s, this grew into an important business which
helped fuel the growth of Oulu’s high-tech cluster. In the latter part of the 1980s, thefirm used Oulu Technology Village, the first science park in Northern Europe, as a site
for the development of embedded software for mobile phones (handsets). At the sametime, in cooperation with the University of Oulu and the local firm Electrobit, it
launched research into CDMA 131 for third-generation mobile phone systems. For
Nokia’s operations in Oulu, the 1970s through the 1980s were a time of enormous
expansion.
In 1976, three years after moving to Oulu to head the cellular telephone division at
Nokia, Lauri Kuokkanen left the firm to start Insele Oy, a manufacturer of metalcomponents for the electronics industry (later bought out by Nokia). The reason for his
Professors Oksman and Otala, and their colleagues at the University of Oulu, can be seen as
the core ‚activity group‛ operating at that time.
130 Equipment which converts analog signals for audio, for example, into digital data. PCM:
pulse code modulation.
131 Abbreviation for code division multiple access. A general term for a system oftelecommunications technology enabling multiple communications to be sent on the same
frequency within the same band. The original technology was used in satellite and militarycommunications (cipher communications). Research aimed at making it available for civil use(third-generation mobile phones) took off in earnest in the 1980s.
12982resignation was that the company had asked him to take charge of all Nokia operations
in Oulu, a job he regarded as unfeasible. A development engineer to the core, he could
not see himself administering a field in which he had no expertise; nor did he feelsuited to running a large organization with over two hundred employees. Afterlaunching Insele, Mr. Kuokkanen was urged by his stockholders to concentrate on
automatic temperature controllers for household use. His own desire, however, was tofocus on the development of duplex filters for wireless communications, which he saw
as a promising field within his own area of specialty. In 1978 he launched Lauri
Kuokkanen Oy with that aim in mind. As duplex filters were core components of thecellular phones that later would become Nokia’s main business – at the time, they weredelivered to Mobira, established in 1979 through the merger of Nokia and Salora’s
wireless telephone divisions – this not only helped Nokia but translated into
substantial growth for Lauri Kuokkanen Oy. However, Mr. Kuokkanen did not take torunning Kuokkanen Oy and in 1985 he sold most of his shares to Nokia. (Under the
new name of LK Products, the firm later grew into one of Europe’s major producers of
duplex filters. In 1998 it became a subsidiary of the British firm Filtronic.) In 1986 Mr.
Kuokkanen started a new firm, Solitra Oy, and began producing components and otheritems for Nokia – which was rapidly expanding its production scale in Oulu – to use atits base station plant in Rusko. Solitra did well, and in 1993 Mr. Kuokkanen sold hisshares in the company. It was later bought by two U.S. firms in succession, ADC andRemec, and carries on in operation today. Establishing Ultracom Oy, he then focusedon the development of wireless data transplant applications. Since 1993, Mr.
Kuokkanen has launched and sold another firm, Ultraprint, and continues to run
Ultracom Oy along with Ultra-Crea Oy, a manufacturer of high-frequency wirelessdevices founded in 1996.
Lauri Kuokkanen did much more than establish Nokia’s wireless telephone business inOulu. (Though the home base for mobile phone handsets moved to Salo along with
Mobira, Nokia’s joint venture with Salora, Nokia’s mobile phone base station division
put down roots in Oulu and did well there.) Even after leaving Nokia, he developed
the core component used by Nokia in its mobile phones – delivered, however, outside
the region, as Nokia produced its mobile phones in Salo – and launched a large
number of high-tech companies important to the Oulu region. These accomplishments
have been of enormous benefit to Nokia itself and to the Oulu ICT cluster. As bothbusinessman and engineer, Mr. Kuokkanen remains a vital part of the industry today.
Oulu has had the immense good fortune not only to be home to Nokia’s wireless83telephone division, but also to have gained a peerless development engineer andentrepreneur in Lauri Kuokkanen. For his development of duplex filters for wirelesscommunications and the launching of numerous important high-tech firms, the Nokia
Foundation honored him in 1995 with the first Nokia Foundation Award. In 2002, at its
graduation ceremony for doctorate recipients, the University of Oulu presented Mr.
Kuokkanen and Dr. Oksman with its most distinguished title, the rarely awarded
Honorary Doctorate of Engineering, in recognition of their tremendous contributions
to the Oulu region.
Birth of Polar Electro: A High-tech Firm with Origins in Oulu
No discussion of the electronics firms operating around Oulu in the 1970s would becomplete without mentioning Polar Electro Oy, the originator of the wristwatch-style
heart-rate monitor.132
Polar Electro was founded by Seppo Säynäjäkangas, who was the first graduate ofOulu University’s Department of Electrical Engineers – he was a member of the
Department of Applied Electronics under Dr. Otala – as well the first from thedepartment to earn a doctorate and the first to become a professor. According to Mika
Kulju (2002), the inspiration for a wrist-worn heart-rate monitor came to Dr.
Säynäjäkangas when, while skiing in nearby Kempele, a junior-class ski coach asked
him to develop such a device to use in his students’ strength training. With Finland’s
Olympic Committee covering part the research costs, Dr. Säynäjäkangas developed the
product in collaboration with his students at the Applied Electronics laboratory. In 1978
he decided to launch his own company after attempts to sell the product and its
technology to the private sector proved fruitless.133 Polar Electro was quick to take off,
and, by the early 1980s, the firm and Dr. Säynäjäkangas were able to invest in otherhigh-tech startups in the Oulu region (including Bascom; Jutel, the maker of radio
broadcast systems; and the software firm CCC). In those days, when Oulu could offer
very little in the way of venture funds or other sources of risk money, Dr.
Säynäjäkangas and his firm were an important presence indeed. By the early 1990s
Polar Electro was exporting its products (winning the President’s Export Award in1992) and was well on its way to becoming synonymous with Oulu’s high-tech industry.
In the middle of the decade the firm was a central force in drafting and implementing
Entries on Polar Electro Oy are based on information taken from Mika Kulju (2002), pp.
93-107, and the company’s website (http://www.polar.fi/).
133 Ibid., pp. 93-95.
132

84

Oulu’s regional policy, along with the Oulu city government and Chamber ofCommerce. It continued to function as an ‚angel‛ to the region’s businesses bysupplying hard-to-find venture capital. (When the Raahe steelmaker Rautaruukki
withdrew from the electronics business, Polar bought its subsidiaries Idesco Oy134, an
IC card manufacturer, and Fincitec Oy, a designer of custom IC cards.) While nowhere
near Nokia in scale, in terms of quality the firm was now a key actor in the Oulu ICT
cluster. Dr. Säynäjäkangas remained as head of the Department of Electrical Engineers
until 1981135, when he left to concentrate on his business interests (continuing, however,to teach entrepreneurship at the university until 2002). As a businessman with roots inthe academic community, he has long served as a role model for the region’s
up-and-coming entrepreneurs. It was significant that an entrepreneur of his ability
should appear from academia almost overnight. 136 And the emergence of such a
company in the virtual absence of an ‚industrial ecosystem‛ was, in a sense, equallyremarkable. At the same time, Jouko Möttönen, a vice-president with the company,
said in an interview that ‚Nokia’s global business initiatives provided a goodbenchmark for Polar Electro’s aggressive moves into the international market.‛

In March 2006, Polar Electro sold its shares in Idesco to the venture capital firm Sentica
Partners Ltd.
135 His feat is particularly astounding when one considers that while he was starting up his
new company in 1978, he was also, until 1981, teaching large numbers of students at theuniversity as head of the Department of Electrical Engineers. Given the general view ofacademic-industrial partnerships prevailing in the Finland of 1978, the fact that theuniversity agreed to his holding his teaching post while simultaneously serving as acorporate CEO speaks eloquently of the university’s strong commitment to the economy ofnorthern Finland. (Dr. Oksman recalls, “Dr. Mannerkowski, the school’s president at thetime, easily agreed to Dr. Säynäjäkangas’s dual career; but, now that I think of it, it wassuch a monumental decision that we should have had him sign some sort of document toback it up.”
136 Although it was not possible to obtain an interview with Dr. Säynäjäkangas, Mika Kulju(2002) describes him as having been born into a farming family in Kemijärvi, in Lapland. In
1944, while still young, he lost his father in the Continuation War with the Soviet Union, a
tragedy that instilled in him a strong sense of responsibility and patriotism (Kulju, p. 99).
Earning high marks as a member of the inaugural class at the University of Oulu’s
Department of Electrical Engineers as a favorite student of Drs. Oksman and Otala, he wasfor many years intimately involved in creating and implementing a vision for the promotionof electronics in northern Finland. After a chance opportunity led to the founding of Polar
Electro, Dr. Säynäjäkangas presided over its development into a global exporter. A strong
will was required to bring about this achievement, which was a first for a high-tech company
originating in Oulu. To prepare a US sales network in the course of its global expansion,
Polar Electro embarked on a series of buyouts that were distinctly bold for the times. In fact,
there are any number of indications that Dr. Säynäjäkangas took a fairly daring approach tobusiness. The abrupt appearance of such an entrepreneur is not only attributable to his
upbringing, but also to his sharing of far-reaching visions with Drs. Oksman and Otala.
134

85

Thus, the principal electronics firms around Oulu in the 1970s were Nokia’s wirelesscommunications business, which moved to Oulu by a piece of good fortune; theelectronics division of Kajaani, which, influenced and supported by a university
professor (Dr. Otala), emerged through the diversification of the existing industry;
Aspo, which moved to Oulu from the South in connection with joint research with auniversity professor (Seppo Leppävuori, acting professor for Dr. Otala); and Polar
Electro, one of the university’s earliest productions. While none of these firms wasparticularly sizeable at the time, each – aided by the activities of Oulu University andits Department of Electrical Engineers (since 1975 the Department of ElectricalEngineering), and by Dr. Otala’s energetic vision – was setting forth on a path thatdiffered markedly from those of its predecessors.

4.3.2 Principal Initiatives in the 1980s① Sense of Crisis in the Oulu City Government; the Founding of Technology Village
As we have seen thus far, the late 1950s through the 1970s was a fertile time for Oulu.
The Department of Electrical Engineering at Oulu University and the VTT Electronics
Research Laboratory were focal points for research on electronics, information
technology and wireless communications, and produced between them a number ofimportant companies. These were to prove vital to the development of the corporate
conglomeration and individual firms that followed in the 1980s.
At the same time, however, Oulu was beginning to lose jobs in its traditional industriesof chemical fertilizers and paper and pulp. Troubled by a heightening sense of crisis,
the city government led the construction of the first technology park in Northern
Europe: Technology Village. It is worth taking a look at the events that led up to its
opening.

Speech by Aspo Director Antti Piippo
Aspo had moved into Oulu in the early 1970s via its subsidiary, Paramic Oy, and in1980 it expanded its plant in the city. A dedication ceremony was held in March of thatyear, and an event that took place there proved epoch-making in terms of theformation of Oulu’s ICT cluster.
86

Antti Piippo, director of Aspo’s electronics division, saw great promise in Oulu as acenter of electronics development, as the region benefited from the presence of both
Oulu University and the VTT Electronics Research Laboratory. A frequent visitor to
Oulu from 1979,137 he praised the area’s potential in an opinion piece contributed thatfall to the local newspaper, Kaleva.138

The important institutions in Oulu are Oulu University and the VTTElectronics Research Laboratory, where basic research is conducted in this field.

The electronics sector is flourishing, and many towns are striving to keep up.
Industries and individual firms in the electronics sector would benefit frominvesting in the same region.
Oulu has the potential to grow into one of Finland’s important centers ofelectronics. The level of education in the field and the wealth of research being
conducted are strengths that are unique to the region.
In Antti Piippo’s view, Oulu’s decision-makers, starting with the city government, did
not fully appreciate the opportunities the region presented and were not taking thesteps necessary to pursue them. An interview with him, in which he voiced thiscriticism in biting terms, appeared in Kaleva on the day of the ceremony marking theplant’s expansion; these same views were expressed in a speech he gave at theceremony itself. Jouko Möttönen, who worked at Aspo at the time, recalls that in the
speech, ‚Antti Piippo said that compared to Silicon Valley, Oulu was still ‘asleep’ andthat development opportunities were likely to recede into the distance while it slept.‛
Representatives of the city sought to counter his criticisms in their own speeches.139
According to Seppo Mäki, Antti Piippo made frequent business trips to Oulu, and witheach visit became more impressed with the city’s living environment and its potential as ahigh-tech community.
138 Mika Kulju (2002), pp. 114-115.
139 Jouko Möttönen, now vice-president of Polar Electro, describes the scene as follows:“After Antti Piippo gave his speech at the dedication ceremony for Aspo’s new plant, a
representative of the city (the head of the city council) voiced a decidedly primitive sort ofobjection in which he denied every one of Piippo’s points. The atmosphere was far fromfriendly. The general feeling was that Piippo was wrong to speak so disparagingly of theregion on such a public occasion. But Antti Piippo is a person who says what needs to be said,
137

87But soon after the ceremony’s conclusion, two of the more thoughtful people in theaudience showed that Antti Piippo had made his point. These were Veli-Markku
Korteniemi, head of product development and marketing at the VTT Electronics
Research Laboratory, and Juha Linna (formerly Castrén), representative of the Oulu
branch of KERA (now Finnvera140), a government bank for regional development. The
day following Piippo‘s speech, the two submitted a proposal to the city council urging
that a ‚technology village‛ be constructed at an early date.
The idea for a technopolis had been considered at least since the late 1970s, when it was
a topic of discussion among some members of the University of Oulu and VTTElectronics Research Laboratory communities. The technopolis concept was first raised
publicly by Martti Karppinen, then on the staff of VTT, in a speech given in 1978.141
According to Dr. Mannerkowski, the university’s president at the time, ‚A visit by
Erkki Koiso-Kanttila, the university’s previous president, to Stanford University (andSilicon Valley) in the late 1960s led to the development of the technopolis concept inOulu.‛142 As I have mentioned, the feeling in Oulu in the late 1970s – a time ofdeclining employment in traditional industries – was that something had to be done.143
Antti Piippo’s blistering comments seem to have ignited an explosive reaction among
those who had already sensed a problem. For that reason alone, the city’s response to
the proposal was swift in coming. Ilmo Paananen, Oulu’s mayor at the time, had nobackground in engineering, but he did possess a deep understanding of new industries.
His efforts toward realizing Technology Village were greatly appreciated by allconcerned. Seppo Mäki says the following about Mayor Paananen’s ability tocomprehend the situation.
I remember Dr. Otala’s speech from 1975, and believe that the mayor listened
regardless of the audience. He remains extremely active even today.” Piippo is currently
chairman of the board and a major shareholder in Elcoteq SE, now Europe’s largest EMS
firm.
140 Finnvera is a wholly government-funded, public financial institution. It supplements
private banks in financing projects aimed at corporate growth, regional development, andexport promotion. Headquartered in Helsinki and Kuopio, it has regional offices in 16
municipalities including Oulu.
141 Mika Kulju (2002), p. 117.
142 Mika Kulju (2002), p. 117.
143 Seppo Mäki describes the situation at the time: “Since the late 1970s, the chemicalfertilizer producer Kemira Oy, and the paper and pulp makers Oulu Oy (now Stora Enso)
and Toppila Oy (out of business since the mid-1980s) had been laying off workers. In the
Oulu city government there was a growing feeling the something should be done.” (Additions
in parentheses are the author’s.)

88very carefully to what the university scholar had to say. Mr. Paananen had been
to Silicon Valley and observed the situation for himself. He provided a great
deal of moral support.
With the mayor’s strong backing, the City Council formed a study team, the Electronics
Working Group, which in September of 1980 presented a report proposing theconstruction of a technology village on a site adjacent to Oulu University.144 Membersof the Working Group included representatives of the VTT Electronics ResearchLaboratory, where the two authors of the reportl were employed, and the government
institution KERA, as well as the University of Oulu, Aspo, and the Oulu city
government (city government employees, rather than city council politicians).
The report was compiled by Paavo Similä, a member of the Oulu city government who
went on to become head of the city’s Bureau of Economic Affairs and currently
president of the Business School at Oulu Polytechnic. More a development plan than astudy,145 the proposal called for the project to be developed as a ‚technology village‛
comprising processing industries and information technology as well as electronics,
rather than an ‚electronics village.‛146
Acceptance of the development plan was followed by a massive effort, led by the city
government, to make Technology Village a reality. Seeing a need to supplement city
government employees with people from the private sector, Imo Paananen looked atover twenty candidates before selecting Seppo Mäki to be the project’s business
relations manager. Mäki had joined the agency in April 1981, bringing with him awealth of experience in business management. He was central to the establishment of
the Technology Village Committee in June of the same year. In September, Paavo Similä
prepared another report which essentially was a business plan for Technology Village
Corporation (Oulun Teknologiakylä)147 While the report took cues from science parks
The area, called Linnanmaa, was originally marshland.
Among those who regarded the report as a study was Olavi Jakkula, who worked in the
President’s Office at the University of Oulu. The report of September 1980 is said toincorporate the essence of a publication he issued in 1978 entitled The Potential of Northern
Finland’s Electronics Industry, which reflected the views of such experts as Dr. Oksman andthe president the University of Oulu.
146 Interview with Seppo Mäki.
147 In 1998 the company name was changed to Technopolis Oulu Corporation (Technopolis
Oulu Oyj). In 1999 the firm was listed on the Helsinki Stock Exchange, and in 2000 thename was shortened to Technopolis Corporation (Technopolis Oyj). Oulun Teknologiakylä
1980-1988: Miten Syntyi Oulu-ilmiö, an account of the activities of Oulu Technology Village
144
145

89

in other countries, in their actual workings these other parks were quite different fromthe model of entrepreneurial support envisaged by the Technology Village
Committee.148
On March 31, 1982, six months after the publishing of the report-cum-business plan,
Technology Village Corporation held an inaugural meeting at Oulu City Hall. Half ofthe 2 million Finnish marks in capitalization was supplied by the Oulu city
government; eighteen private companies, the University of Oulu, and KERA, the bankfor regional development, supplied the rest.
Obtaining capital from the private sector was not an easy task.149 The city fathers
regarded the project as basically a private-public partnership (PPP), still a novel
concept in their view despite its growing popularity. According to Seppo Mäki, theproject would have had to be abandoned if funds from private companies had not been
forthcoming. Indeed, it was in order to realize Technology Village as a PPP that Oulu’scity leaders had scouted Mäki150 as someone who could bring them the management
skills they needed. Until he left the city government in 2000, Mäki remained at his postof business relations manager, marketing the city of Oulu at home and abroad. But it
was his single-minded efforts to get investors for Technology Village that still inspirehead-shaking admiration among key people involved in project. The following is anaccount from Jaakko Okkonen, executive director of the Oulu Chamber of Commerceand Industry:In the 1980s, the main role in fund-raising was played by the Oulu city
government. The most prominent figure was Seppo Mäki, who served as
Oulu’s spokesman and architect of the Technopolis. Each and every day hewould go around the city selling shares in the company.
Mäki’s efforts after the inaugural meeting were no less impressive than those that led
up to it. As Technology Village expanded, he worked tirelessly to raise the necessary
Corporation published by SITRA in 1988, gives the English name for Oulu Technology
Village as “Oulu Technology Park” (English summary). Titles used in a map of theTechnology Village area suggest that the contemporary Finnish name was “Teknopolis
Oulu.”
148 Interview with Paavo Similä (pp. 92 of this paper).
149 Interview with Seppo Mäki.
150 Mäki says that his family has been involved in commerce and business management for
many generations.

90

additional capital. Mäki himself has the following to say about the increase in investors
and the city government’s basic stance on public-private partnerships.

There were twenty-one shareholders in Technology Village at the outset; theseincluded eighteen private companies, the City of Oulu, the University of Oulu,
and KERA. By 1992, when I resigned as chairman of the board, there wereabout four hundred; in 1999 we went public and today the number stands atfour thousand or so. Today’s shareholders include foreign investors, some ofwhich are American pension funds. At the time the corporation was founded,
Oulu City held 50% of the shares, but only two of the city’s seven directors
were committed to the company and those were city government employees.
No city council members were included. In Imo Paananen’s view, as public
employees we did not wish to lead (a project which required inputs ofprivate-sector expertise). For the politicians involved, there was also the issueof elections to consider. That was when the idea of a private-public partnershipreally took hold.
At the beginning there were seven people on the board of directors, with Seppo Mäki
serving as chairman.151 The post of vice-chairman was filled by Jarmo Karvonen, aformer member of the VTT Electronics Research Laboratory who went on to become
director of development for Kajaani Electronics. Also on the board were Martti
Karppinen, another employee of the VTT lab and the first to speak out on thetechnology village concept; Sakari Kurronen, dean of the Engineering Department at
the University of Oulu; Tapio Takalo of KERA; Heikki Ojanperä of the chemical firm
Pharmos G (later Orion G); and Paavo Similä of the Oulu city government. Most weremembers of the Technology Village Committee since June 1981. (The board was later
expanded to nine members, including Reijo Lehtonen, president of a cable company
and head of the Oulu Chamber of Commerce and Industry.)

Having managed to secure sufficient capital, Technology Village Corporation was now
in business. Science parks did exist in other countries, but the scheme envisaged for
Seppo Mäki served as board chairman from the company’s founding until 1992. The
mayor of Oulu later took over the position. (At present the deputy mayor represents Oulu
City on the board.)
151

91

Oulu – a place where high-tech startups could obtain everything they needed – wasabsolutely new. The founders had to feel their way forward. Paavo Similä, author of thecommittee’s report, says the following about the corporate philosophy of meeting theneeds of Technology Village’s high-tech tenants and supporting their growth, which
underlay the project’s business model:
The report (of the Technology Village Committee) issued in September 1981
reflects the views of the many people interviewed in its making. It outlines abusiness plan for Technology Village. In compiling the report, we searched theliterature on science parks in France, the United Kingdom, and America. After
Technology Village was launched we carried out on-site surveys (of thesescience parks). When we put the report together, we relied on written materials
and pamphlets sent to us by the science parks themselves. From these welearned how the parks were organized, and also about their functions, targets,
operation, and relationships with local universities and firms. We found thatthey were structured in a way that was quite different from what weenvisioned. Our on-site investigations found that many local companies hadcomplaints. In Edinburgh , for example, the park’s efforts extended only to
making land for research facilities available next to the university. A number offirms saw no particular benefit in this other than proximity to the school. We,on the other hand, recognized that the needs of high-tech companies arediverse, and we intended to answer these needs and go on answering them. It
was not I who came up with this idea, but the whole committee, through day
after day of spirited debate. To a great extent, our methods developed as aresult of frequent discussions held by Timo Patja, the first president ofTechnology Village Corporation (from 1982 to 1985), and Pertti Huuskonen, his
successor (1985 to the present), with our tenants. Technology Village owes a lot
to these two men, both of whom had launched high-tech firms of their own. If
the only goal had been to provide corporations with land, it could have been
met just as easily by the construction industry. We wanted something different
for Technology Village. (Additions in parentheses are the author’s.)
In these remarks we can see the entrepreneurial principles behind Technology Village,
which, in 1999, accomplished something unusual for a science park when it was listedon the Helsinki stock exchange. Also evident is a philosophy that stresses theaccumulation of information and skills from all available sources. The role of the92

company’s two presidents was, as Paavo Similä pointed out, profoundly important. At
no time was this truer than at the startup stage, when the company chose an old dairy
plant to house its first facilities. A commitment to learning enabled Mr. Patja toovercome the many obstacles involved in remodeling the old buildings into a modern
workplace. 152 In October 1985, work on the first buildings began at Linnanmaa,
adjacent to the University of Oulu, in accordance with the original plans. The company
was now under the leadership of Pertti Huuskonen, a graduate of the university’s
Department of Electrical Engineering and himself an experienced entrepreneur. Using
his network of contacts to the fullest, he worked hard to expand the company’s
operations, taking every opportunity to publicize the Oulu Technopolis at international
conferences153 and other global venues. The project was fortunate to have exactly theright president for both the startup and development stages.
While

the

two

presidents

provided

vitalleadership,

othersalso

madeessential contributions. During the 1980s in particular, Technology Village Corporationand the City of Oulu tended to be of one mind about the project. The city government
took charge of promotion policies for the city’s high-tech industries and for regional
strategies as a whole, while the job of Technology Village Corporation was to develop
and implement the skills needed to support high-tech firms. (Although the corporation
was a third-sector company with a contribution half that of the City of Oulu, the city
government advocated a PPP arrangement from the beginning as it wished to avoid
interfering in the firms’ business at all costs. With a president who was himself atalented entrepreneur, the corporation avoided the inefficiencies that are liable to befall
a third-sector enterprise.)In this sense, the city government played a key role in the formative strategies for
Oulu’s ICT cluster during the 1980s. Following the launch of Technology Village
Corporation it prepared a five-year industrial policy for the years 1983 – 1987. This was
a comprehensive policy which covered the operation of Technology Village
Corporation and attracted a good deal of interest when, in 1984, it was announced
along with thecatchphrase ‚City of Technology.‛
The five-year program, ‚Economic and Business Development Program: Oulu as a City
Mika Kulju (2002), pp. 124-127.
For example. annual general meetings of the International Association of Science Parks(IASP).
152
153

93

of Technology,‛ offered practical plans for what many regarded as the two central
issues: how to promote the emergence of new industries and new companies in Oulu,
and how to offer these new industries and companies the information and skills theywould need to grow. With cooperation from the University of Oulu, the VTTElectronics Research Laboratory, Technology Village Corporation, Polar Electro, andother leading local firms, the program was put together by a four-man team: two
experts in the form of Paavo Similä and Seppo Mäki; Hannu Salomaa of the consulting
firm Hansakon; and publicity chief Jorma Ventila, formerly head of publicity for the
steelmaker Rautaruukki. The program’s regional strategies – some of which would
only later see the light of day – involved, among other things, the creation of a
University of Oulu liaison officer, starting in 1986 and operating with city funding forthe first three years; the Enterprise Forum, an entrepreneurial seminar for students,
initiated in 1986 and administered by the university liaison officer; and the Oulu Soft
Project, an industry-university collaboration for local software.
The author of the report outlining this strategy was Paavo Similä, who had written thereport of the Electronics Working Group in 1980 and would now manage the project
team formed to implement the program.154 According to Mr. Similä, the economic
development program was planned and put into practice by a network of individual‚key persons‛ in the Oulu area.

In 1984, we called for a basic strategy for the city of Oulu – the ‚City ofTechnology‛ strategy. I was the project’s manager. The major players at thattime included the University of Oulu, the VTT Electronics Research Laboratory,
the Polytechnic (then the Institute of Technology), the Oulu city government,
Polar Electro and a few other companies, and Technopolis. Unlike the situationin 1990, this group did not include local governments or a great many private
firms from the Oulu region. Rather, I think it was the functioning of a networkof key persons that produced results. (Additions in parentheses are theauthor’s.)
The ‚City of Technology‛ catchphrase proved a big hit and was used for years
thereafter to symbolize the city of Oulu. Various strategies were drawn up to publicize
When the city government established a Bureau of Economic Affairs upon the project’s
completion in 1988, Paavo Similä was named its director.
154

94the phrase, including posters made out of composite photographs. Seppo Mäki
describes the process:Our publicity expert, Jorma Ventila (one of the formulators of the program),
wracked his brains to find ways to make the concepts behind Oulu’s regional
strategies understood by people in other areas. He came up the phrase ‚City ofTechnology‛ as a means of doing this. He also arranged a variety of events andinvited people from Helsinki to attend. He really left no stone unturned in his
attempts to get the phrase across. To get people to comprehend the idea of a‚City of Technology,‛ he had an aerial photograph taken of the city center,
superimposed on it an image of electronic components on a circuit board, andhad this made into posters and postcards. That was my idea. To a modern eye
the image of electronic components mounted on a circuit board may seem atrifle dated, but the technology it depicted was new at the time. Since we didn’t
want to pay for our publicity activities with Oulu taxpayers’ money, we
decided to rely on more tangible things, such as events, to publicize theTechnopolis and regional strategies. (Additions in parentheses are theauthor’s.)
The Oulu region had not yet become known as the site of an ICT cluster. The region
was still trying to sell Oulu as a high-tech city, using Technology Village – the firstscience park in Scandinavia – as a lever. But even in terms of building the city’s
reputation as a center of high technology, we can see a considerable element of strategy
in, say, the use of professionals to handle publicity.

Visit to Oulu by USSR President Mikhail Gorbachev
In 1989, USSR President Mikhail Gorbachev visited Oulu at the invitation of SITRA, theFinnish national fund for research and development. The Oulu Bureau of Economic
Affairs arranged the visit, one of its most important accomplishments of the 1980s. By
the end of that decade Technology Village had gained considerable fame in
Scandinavia as a science park. In 1988, SITRA had published a log of the activities ofTechnology Village Corporation subtitled ‚A Chronology of the Oulu Phenomenon,‛155
sparking the interest of the Soviet Union Academy Group which sent a delegation to
According to Dr. Oksman, the term “Oulu phenomenon” came into use in the late 1970s,
when the electronics industry was putting down roots in the Oulu region.
155

95

the city. One member, an advisor to the Prime Minister, was so impressed with thedevelopment that Technopolis had brought to the region and with the strategic
thinking and hospitality156 of the city’s Bureau of Economic Affairs, that he strongly
recommended that Oulu be included on President Gorbachev’s itinerary for his visit toFinland in 1989. The Soviet President’s visit served as an important pillar of the
publicity effort for many years to come.157② Corporate Trends from 1985 through 1989
The establishment of Technology Village in the 1980s was instrumental in promoting
corporate conglomeration. In the following I summarize the more important trends inthis process.

Development of Embedded Software by Nokia Mobira
In March 1986, work was completed on a structure begun the previous year in
Linnanmaa, adjacent to the University of Oulu, where Technology Village had moved
from the city center. In addition to Nokia Mobira, three other companies rented spacein the buildings.158 Nokia had begun developing base stations in Oulu’s Rusko districtin the latter half of the 1970s, and by the early 1980s was manufacturing there on aconsiderable scale. It was in the latter half of the 1980s, however, that Nokia Mobira
started developing embedded software for mobile telephones – just when Technology
Village was starting full-fledged development in Linnanmaa.159
The central figure at this time was Erkki Veikkolainen, who had moved to Nokia
Mobira from the VTT Electronics Laboratory. Veikkolainen had graduated in 1980 fromthe Department of Electrical Engineering at the University of Oulu, joining VTT in
September 1981 after working for a short time in western Finland. In 1983 he became
deputy head of the division working on embedded software and engaged Nokia
Mobira in its joint development. In 1984, Mobira had decided to develop its embedded
Seppo Mäki made an enormous contribution to the selling of the city of Oulu
internationally.
157 During his visit to Helsinki, President Gorbachev was filmed using a Nokia mobile phone
to call Moscow. The image was aired throughout the world and was an outstanding publicity
boon for Nokia. (Staffan Bruun & Mosse Wallen (1999), p.94 of the Japanese translation)
158 These were Noptel Ky, Prometrics Oy, and Outel Oy (Mika Kulju (2002), p. 142).
159 Entries on Nokia in and after the latter 1980s are based on Mika Kulju (2002), pp.
130-134.
156

96

software for mobile phones in Oulu160, and commissioned that work to the division at
VTT. (Mobira had only one or two embedded software experts at the time.)
Dr. Veikkolainen joined Nokia Mobira in 1985, and immediately upon doing so heassumed responsibility for the development of embedded software for mobile phones.
He increased the number of development staff in Oulu from the start, turning also tooutsourcing for many processes. His reasons were twofold: first, he saw this as themost rational method of software development; second, he wanted to make sure thathigh technology became firmly established in the Oulu region and northern Finland asa whole. Dr. Veikkolainen has this to say about the distinguishing features of softwaredevelopment and his flexibility in using outside companies for some of the processes
involved:
As I saw it, taking a flexible approach to outsourcing, rather than insisting on
having all development personnel in-house, brought advantages in terms oftime and dynamics. Nokia would benefit, of course, but so would the entire
region. Nokia Mobira had just launched its development unit for embedded
software for mobile phones, and in order to achieve success, I felt we needed tocreate an environment in which we could work together with a set of partnercompanies. And, we needed to share a vision with these partner companies.
This kind of thinking is the norm today, but in those days I was in the minority.
It was a logical way to think, however, since for each software development
project one has to form dedicated teams to deal with hardware, radio
frequency (for wireless communications) and mechanicals. When several
projects are pursued at a time, it is impossible to gather the number of people
required from within the company (or, conversely, you might find yourself
with an excess of personnel). (Additions in parentheses are the author’s.)
In terms of his contribution to regional development while at the University of Oulu
and the VTT Electronics Research Laboratory, Dr. Veikkolainen was strongly
influenced by Dr. Oksman and Dr. Otala, who headed the Laboratory at the time. Dr.
In Dr. Veikkolainen’s words (reprinted from Chapter 4-3-1), “One reason for Mobira’s
choice of Oulu as its center for (software) development was the leading-edge research insoftware being conducted at the University of Oulu and VTT Electronics. Oulu at that time
was already the site of the most advanced work in Finland. Another attraction was atalented workforce in the form of the University of Oulu graduates. People involved with theuniversity worked hard to attract Mobira to the region. (Addition in parentheses is theauthor’s.)
160

97

Veikkolainen, who took part as a student in a ‚Sauna Event‛161 held by the two
professors in 1978 or 1979, recalls that at the event the three found they shared a visionof what should be done for the future of northern Finland. Perhaps this was why,
immediately after joining Nokia Mobira as a local businessman, Dr. Veikkolainen tookbold action based on clear-cut intentions. Dr. Veikkolainen says the following about his
state of mind and the events which occurred at that time.

In 1985 I wrote an article for a local newspaper, titled ‚Nokia Seeks
Outsourcing Agents for Software.‛ Juha Hulkko, who had just launched
Elektrobit, read the article and paid me a visit. This was start of the alliance
between Nokia and Elektrobit. Elektrobit was aiming to develop original
products at that time, but for a while its main work was development
subcontracting for Nokia. CCC was another such firm, and there were anumber of others as well, but some of these were absorbed by other companies.
During those years, many engineers who grew up in northern Finland and got
their schooling at the University of Oulu went south after graduation and built
up experience there. The shared perceptions that took root after the Sauna
Event may have had something to do with it, but Nokia saw cooperation with
Oulu’s local companies as a good opportunity to contribute to the communitiesof the North. Juha Hulkko, the founder of Elektrobit, shared this view. Actually,
the first thing I did upon moving to Nokia Mobira was to get in touch withpeople working in the South and asking them if they wouldn’t like to comeback to Oulu. Quite a few engineers in fact did.‛ (Additions in parentheses
are the author’s.)

Both Elektrobit and CCC were started in 1985 by graduates of the University of Oulu.162
For the Finns, the sauna is both a form of hygiene and a social occasion (interview with
Seppo Mäki). When, in the latter half of the 1960s, Dr. Oksman and Dr. Otala agreed on theneed for promoting northern Finland and a vision for the development of the electric andelectronics industries, this was referred to as the “Sauna Meeting.” (Matti Otala, “Uskalla
olla visas,” Ajatus Kirjat, Jyväskylä, 2001 (here, from Mika Kulju,(2002), p. 56), andinterviews with Dr. Oksman.
162 Elektrobit was founded by Juha Hulkko, a graduate of the Department of ElectricalEngineering; CCC by Timo Korhonen, a graduate of the Faculty of Science’s Department ofInformation Processing Science.
161

98

They enjoyed growth as subcontractors of Nokia and grew into two of the mostprominent high-tech firms of the Oulu region. The times were fortuitous for Dr.
Veikkolainen and other Oulu business leaders. But to a great extent, they were
motivated by people who worked at the university in the 1970s.
The mid-1980s were propitious in a number of respects: With progress in theaccumulation of companies and the rapid growth of key firms, this was when the Oulu
ICT Cluster began to take off. Five factors stand out as particularly important:(1) Engineers were settling in the region in growing numbers. (While most graduatesof the university’s Department of Electrical Engineering looked for work in theSouth, several hundred remained in the North from the department alone; see
Figure 4-15.)(2) A key company, Nokia, was starting to expand its range of business and experiencesignificant growth. (Nokia began taking its base systems global in 1984 and started
developing embedded software for mobile phones in 1985; in the latter half of thedecade it started research and development of CDMA technology for
third-generation mobile telephone systems.)(3) Oulu was an advantageous place to locate not only in the physical sense, but also
because it now offered, adjacent to the university, a technology village filled withcompanies aspiring to serve as support systems for the new companies. (In March
1986, the first building on this site was completed.)(4) In 1984, the City of Oulu implemented in full scale its ‚City of Technology‛
industrial policy.
(5) Augmenting all of the above was the Finnish Government’s support fortechnological development. In 1987, Nokia Mobira, in partnership with the nation’s
Ministry of Defense, began working in Oulu with Elektrobit and the University ofOulu on the development of spectral diffusion technology, used in CDMA andother third-generation mobile phone systems163 – a big factor in Oulu’s subsequentdevelopment into a global center of mobile technology.
Petro Pulli, a professor at the University of Oulu’s Department of Information
Processing Science, and his colleagues believe it was the national government’s
unstinting support for the development of wireless communication technologies until
1995, when Finland became a member of the European Union, that enabled Nokia to
163

Email message from Eero Vallström (April 28, 2006).

99

solidify its advantage in the global market in terms of, for example, technologicaldevelopment and market share. In their analysis, this was a major factor in Nokia’s
becoming the world’s top manufacturer of mobile telephones and base systems in thedecade’s latter half.164 This meant that Oulu reaped the benefits of national policies on
industry and technology – an important point that should not be overlooked.

Figure 4-15

Numbers of Graduates of the Department of Electrical Engineering,

University of Oulu, by Laboratory (Cumulative)
2500
OthersRaahe campus

2000

TKT, TKO (Computer
Engineering)
1500

TIL (Information andCommunications)
TF (Applied Physics)

1000
MIT (Measurement
Technology), OEM(Optoelectronics)
MIK (Semiconductor
Engineering, Material
Properties)

500

INF, INFO (Information
Processing)
0
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005

ELE (Electronics)

164

Interview with Petri Pulli.

100

Data for Figure 4-15
Calendar Year
ELE (Electronics)
INF, INFO (Information
Processing)
MIK (Semiconductor Engineering,
Material Properties)
MIT (Measurement Technology),
OEM (Optoelectronics)
TF (Applied Physics)
TIL (Information andCommunications)
TKT, TKO (Computer
Engineering)Raahe campus
OthersTotal number of graduates

1969
1

1970
3

1971
12

1972
21

1973
32

1974
44

1975 1976 1977 1978 1979 1980 1981
57
66
73
77
85
99 108

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

1

1

1

1

1

1

0

7

14

25

33

41

53

64

69

70

76

84

96

0

0

0

3

6

6

6

6

11

12

15

18

19

0

4

12

28

36

40

43

54

60

64

71

80

91

0

0

0

0

3

7

8

15

24

34

42

54

66

0
0
1

0
0
14

0
0
38

0
0
77

0
0
110

0
0
139

0
0
168

0
0
206

0
0
238

0
0
258

0
0
290

0
0
336

0
0
381

Calendar Year
ELE (Electronics)
INF, INFO (Information
Processing)
MIK (Semiconductor Engineering,
Material Properties)
MIT (Measurement Technology),
OEM (Optoelectronics)
TF (Applied Physics)
TIL (Information andCommunications)
TKT, TKO (Computer
Engineering)Raahe campus
OthersTotal number of graduates

1982
116

1983
128

1984
139

1985
148

1986
153

1987
161

1988 1989 1990 1991 1992 1993 1994
173 184 198 212 225 254 277

0

0

0

0

0

0

0

0

0

0

1

3

11

1

1

1

2

4

8

12

17

20

21

27

34

34

104

119

122

127

132

135

138

142

147

153

158

164

169

22

26

33

36

37

37

37

37

37

38

38

38

38

95

104

108

114

127

151

171

195

214

229

245

272

291

78

90

104

123

142

154

173

195

214

229

243

271

293

0
0
416

0
0
468

0
0
507

0
0
550

0
0
595

0
0
646

0
0
704

0
0
770

0
0
830

0
1
883

0
0
0
2
3
6
939 1,039 1,119

Calendar Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
ELE (Electronics)
305
326
341
364
401
448
490 514 531 554 564
INF, INFO (Information
18
24
34
53
71
88
114 133 157 195 217
Processing)
MIK (Semiconductor Engineering,
34
35
35
37
38
39
44
46
49
54
63
Material Properties)
MIT (Measurement Technology),
170
177
184
192
196
210
219 226 238 252 259
OEM (Optoelectronics)
TF (Applied Physics)
38
38
38
38
38
38
38
38
38
38
38
TIL (Information and
308
333
351
385
410
429
454 474 491 510 520
Communications)
TKT, TKO (Computer
312
331
346
359
382
408
448 483 514 550 571
Engineering)Raahe campus
7
11
15
16
24
25
28
28
28
32
32
Others
15
27
37
41
43
46
47
50
52
54
54
Total number of graduates
1,207 1,302 1,381 1,485 1,603 1,731 1,882 1,992 2,098 2,239 2,318

Source: Ilkka Heikura (2005), pp. 200-254, from directories of graduates of the
Department of Electronic Engineering, University of Oulu.

③ Medipolis – The Technopolis Takes a New Direction
Information and computer technologies are the principal, but not the only, industries
101comprising the Oulu hi-tech cluster. Bioindustry and the ‚wellness‛ sector also are
major components. In the mid-1980s, promotion of bioindustry emerged as a topic ofdiscussion for the Oulu city government’s project team for the City of Technology.
According to Mika Kulju (2002), Technology Village Corporation CEO Pertti
Huuskonen had made the establishment of incubators for the bio- and wellness
industries part of his business strategy as early as 1987.165
In 1988, after the Technopolis had moved to the Linnanmaa site next to the university, aworking group took up the idea of a ‚Medipolis‛ to serve as the focus for firms in thebio- and wellness industries. The group included representatives of the Economic and
Health and Welfare bureaus of the Oulu city government, Technology Village
Corporation, the Faculty of Medicine of the University of Oulu (including the Instituteof Biomedicine), Oulu University Hospital, and the public-sector Research Institute for
Workplace Health.
The Medipolis project officially began in 1989. In June of the following year, Medipolis
Oy was established as a 100%-owned subsidiary166 of Technology Village Corporationand construction started at Kontinkangas, not far from the city center. A building was
designed with an elevated hallway to connect it with Oulu University Hospital, and its
construction in May 1992 marked the completion of Phase 1 of the Medipolis. This wasfollowed by a 100-thousand-euro manufacturing facility, constructed according to good
manufacturing practice (GMP)167, for the commissioned production of pharmaceuticals.
Taken as a whole, these investments have been criticized as growing at a slower pace,and delivering less than expected, when compared with industries in the ICT sector.
Today, however, the Medipolis is home to fifty firms employing six hundred people.

4.3.3 Principal Initiatives in the 1990s① Cooperation between the Oulu City Government and the Oulu Chamber ofCommerce and Industry
Huuskonen got the idea for a business plan while taking part in a conference on scienceparks held in Turku (Mika Kulju (2002), p. 149).
166 The City of Oulu contributed somewhat later (contribution ratio: 24%).
167 These are a set of standards for production and quality control in the manufacture of
products including pharmaceuticals. Quality control is conducted at each stage of the
production process in order that ensure that pharmaceutical products are of high quality
and free of contamination. Manufacturers of drug products are required to obey the rules.
165

102

The second half of the 1980s was a busy time for the main regional actors working for
an Oulu ICT cluster. The early 1990s, however, brought the breakup of the Soviet
Union, and Oulu was among the regions that suffered from the ensuing economic
depression. By that time, however, ICT industries were springing up around Oulu, andthe economy as a whole recovered relatively quickly.
It was in this environment that the Oulu Bureau of Economic Affairs and the city’s
Chamber of Commerce and Industry drafted a new economic development strategy
designed to lift the region out of stagnation and nurture the growth of new industry.168
This strategy differed in two important respects from that which had been put forwardin the 1980s (the ‚City of Technology‛ economic development program carried out
from 1983 through 1987): first, it applied not only to the city of Oulu, as the earlier
strategy did, but to surrounding communities as well, and second, it involved many
top managers of private companies.
There were good reasons for the differences in the new policy. Buffeted by the effects ofthe economic slowdown, local governments were faced with the need to take bothindustrial and employment policies. But straitened finances, among other things,
prevented them from implementing industrial policies on their own. In those days,
Nokia was expanding its base station business (both the development and production
sides) in the Oulu region, as well as its research and development of embedded
mobile-phone software and third-generation CDMA technology. Partly for that reason,
Elektrobit, CCC, JOT Automation and other firms were enjoying growth as
subcontractors of Nokia. Polar Electro, founded in the 1970s by colleagues from the
University of Oulu169, had achieved a national reputation. And existing industries, suchas processing, were obviously hit hard by the recession as well, and were anxious tofind a way out of their predicament. All of these sectors, therefore, were enlisted tocontribute to the formulation of an effective industrial policy.
Paavo Similä, of the Oulu city government, and Mr. Makella, Managing Director of thecity’s Chamber of Commerce and Industry, were the principal planners of the strategy.
Descriptions of cooperation between the Oulu city government and the Oulu Chamber ofCommerce and Industry were mainly obtained through interviews with Paavo Similä, Seppo
Mäki, and Jaakko Okkonen (Managing Director of the Oulu Chamber of Commerce andIndustry).
169 Seppo Säynäjäkangas, Polar Electro’s founder and a professor of entrepreneurial skills
at the University of Oulu, and Tapio Tammi, the firm’s CEO, were instrumental informulating the regional strategy and promoting Oulu internationally.
168

103

Paavo Similä reflects on an organizational approach which took in a wide range ofparticipants:
When we planned the regional strategy in the early 1990s, (unlike the planning
process in the 1980s) we sought the involvement of a large number ofcompanies. Neighboring communities also participated, so that the program
covered a much wider area in the geographical sense as well. The governmentsof these communities could never have accomplished this on their own (andOulu, too, benefited from their participation). Prior to formulating the strategy,
we held a number of discussions – Mr. Makella, Managing Director of the
Chamber of Commerce and Industry, some others involved, and I.
Unfortunately, Mr. Makella passed away shortly afterward. He and I formed aworking group to discuss a vision for Oulu’s industries and the directions theyshould take. We assembled corporate leaders, academics from the university(including a liaison officer), some people from the city government (Seppo
Mäki and Paavo Similä), political leaders (Risto Parjanne had become mayor),
and others. It was especially important that we included so many corporate
leaders – Tapio Tammi and Seppo Säynäjäkangas of Polar Electro were notably
enthusiastic – and that they demonstrated such a commitment to the strategy.
The 1980s strategy was drafted by a personal network of key people; the 1990s
strategy was an organization-wide effort. Ultimately, it was I who compiled theWorking Group report (in 1993). This was the region’s common will andcommon strategy. (Additions in parentheses are the author’s.)
The Oulu Region Economic Development Strategy was planned with the fullparticipation of local businesses. Jaakko Okkonen of the Oulu Chamber of Commerceand Industry says that coordinating the planning process was far from easy, but theend result was ‚business-oriented‛ and enjoyed widespread support from privatecompanies; this greatly facilitated the job of putting it into practice.
Industrial strategy in the Oulu region at the time did not focus only on high-techindustry in the strict sense. Projects also were launched or envisaged in fields such asmechanical engineering (a 1992 project aimed at utilizing the steel and stainlesssteel-making plants around Raahe and Tornio to create a cluster of related industries),
chemicals and other processing industries (a project in the same year provided support
for spinouts of processing firms), and transportation (a ‚Logistics Village‛ was a104

subject of discussion in 1991). This was also a time of alliances with other parts ofEurope, as, in 1992, a regional cooperation project between Oulu and the German stateof Baden-Wuerttemberg was expanded into ‚Euroregion 2000.‛ Comprehensive
strategies were becoming the general trend. For one thing, while substantial effort hadgone into regional strategies carried on continuously since the 1980s170, there was stillmuch left to do and a growing demand for new approaches. The economic downturn,moreover, meant that people in industries outside of the ICT sphere were increasinglyinterested in measures employable on a regional scale.
② Moves to Improve the Environment for New Business: TeknoVenture and Oulutech
In 1994, conditions affecting new business creation in Oulu underwent enormouschange, partly because of the need to accelerate the fostering of new companies andshake off the recession that took hold in the decade’s early years, and partly owing to
the effects of ‚trial and error‛ measures taken since the 1980s to build up a high-techindustrial cluster. The founding of TeknoVenture Oy, a local venture fund, andOulutech Oy, a virtual incubator171, changed the environment significantly.172
TeknoVenture is a regional fund financed by KERA, a government financial institution
focusing on regional development (now Finnvera173; more than 40% contribution); theCity of Oulu (25% contribution) and other neighboring municipalities (more than 40%
aggregate contribution); and SITRA, a public fund extending support to venture firms(5.1% contribution). TeknoVenture is operated by the privately-financed TeknoVentureManagement;174 It was established in 1988 with capitalization of 80 million Finnish
These included the opening of a business school at the University of Oulu in 1990, thestartup funds furnished by the City of Oulu and the Oulu Chamber of Commerce andIndustry. (Interview with Seppo Mäki) The university had been providing businesseducation since 1988, however, as part of the Faculty of Economics. (Home page of theuniversity’s Faculty of Economics and Business Administration:
http://www.oulubusinessschool.fi/ )171 “Virtual incubation” refers to all fee-based support services except the rental of space.
Space rental is handled by Technology Village.
172 Descriptions of TeknoVenture are taken principally from the company’s home page(http://www.teknoventure.fi/) and email correspondence with its president, Ilkka
Lukkariniemi (November 24, 2005). Descriptions of Oulutech are taken principally from thecompany’s home page (http://www.oulutech.fi/) and interviews with its president, Martti
Elsilä.
173 Finnvera is a public financial institution, wholly funded by the government, which
supplements private financing of projects aimed at corporate growth, regional development
and export promotion. Headquartered in Helsinki and Kuopio, it has regional offices in 16
municipalities including Oulu.
174 In English, the name translates as The Finnish Fund for Research and Development. It
was established in 1967, the fiftieth anniversary of Finland’s independence, for the purpose
170

105

markka (mk) (about 15 million euro) when Technoinvestment Oy, a venture fundfinanced by KERA and local private financial institutions, proved unable to achieve its
initial goals due to insufficient capitalization (10 million mk). In the two years
following its founding, TeknoVenture invested in ten companies selected from among
one hundred it examined. Among the ten was JOT Automation, which in 2002 would
merge with Elektrobit to form the Elektrobit Group.
Oulutech provides entrepreneurs and high-tech startups with all types of support
except rental space. Funding for the firm’s establishment came from SITRA (40%contribution), Technology Village Corporation (30% contribution) and the University ofOulu Fund (30% contribution). Oulutech grew in part out of an entrepreneurial
support organization called Innonet founded in 1992 at the University of Oulu.
Technology Village Corporation had made it its mission to supply the diverse range
needed by tenants; Oulutech was created to provide a wider range of more specialized
services. These include management services, such as assistance in preparing businessplans and controlling intellectual property rights 175 , and, in the realm of finance,
obtaining research and development funds from public institutions and connectingwith sources of venture capital. Oulutech also introduces startup firms to sales
networks and helps them develop such networks internationally. It refers firms to
management teams, conducts employee training programs, and provides many otherservices tailored to each company’s stage of development.
③ Oulu Named Model Region under Ministry of the Interior’s COE (Center ofExpertise) Program
The Finnish Government was among those that recognized the excellence of Oulu’s
regional strategies and the corporate growth that took place there, in terms of both
number and development, from the mid-1980s. As the country sought ways of digging
out from under the recession, Oulu played host to a series of observation teams eager
to see what it could teach them.176
Having studied Oulu’s regional strategies, Finland’s Ministry of the Interior, thenof furthering the nation’s economic development and improving its competitivenessinternationally. Previously under the supervision of the Bank of Finland, SITRA has since1997 operated as an independent institution under the supervision of the Finnish
Parliament. Its headquarters are in Helsinki.
175 Licensing services are currently outsourced.
176 Interview with Paavo Similä.

106

training staff for the region’s major research and educational institutions, decided to
introduce the CEO (Center of Expertise) Program as a nationwide regional policy(Regional Development Law No. 1135, 1993). Under the program, plans weredeveloped by individual regions and submitted for appraisal to the Interior Ministry.
Those that qualified as ‚COE regions‛ would have half of all their expenses paid by theGovernment. Oulu applied in the fields of electronics, telecommunication, software,measurement technology, and medical and biotechnology. When the first selections
were made in 1993, Oulu – to no one’s surprise – ranked first among the five regions
chosen177 (coverage was later expanded to the current fourteen geographical areas).
Each region had its own strategies, with some relying too much on alliances with
universities and not enough on corporate participation. But Oulu’s strategy, as we haveseen, was based on the full commitment of local businesses, and in that sense it proved
remarkably effective.178
Utilizing the funds made available through the COE Program, and profiting as wellfrom the rapid growth of Nokia, Oulu’s ICT cluster continued to develop in the late
1990s. Growth peaked in the year 2000, mirroring trends in the IT sector throughout
the world.

4.3.4 Principal Initiatives in the 2000s① The Oulu Growth Agreement
Starting in 2001, Oulu began to be affected by the tendency of firms shaken by the IT
slump and the trend toward globalization to shift production to other regions. From2001 through 2002, shipments and other indicators underwent a serious, if temporary,decline. The impact of this trend on Oulu was relatively mild, however, as most of thelocal operations of its core company, Nokia, involved research and development rather
than manufacturing.179
Oulu dealt with the situation by formulating a business strategy covering the five years
Interview with Jaakko Okkonen of the Oulu Chamber of Commerce and Industry.
Ibid.
179 Nokia’s workforce in Oulu fell off from 4,700 persons in 2000 to 4,271 in 2001 and 4,134
in 2002. It later recovered, however, reaching 4,580 in 2005. (The figure for 2000 is an
estimate provided by Eero Vallström in an interview. Other figures were provided by the
Oulu Regional Business Agency.)
177
178

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from 2001 through 2006 within the framework of the COE Program (Table 4-1). Knownas the Oulu Growth Agreement, the strategy aimed creating five industrial clusters: for
ICT, bioindustry, wellness (health and welfare), the environment, and contents andmedia. Also included were two support programs for the logistics and businessdevelopment industries (Table 4-2). The principal activities of each cluster would be
carried out by related industries at voluntary, cooperative venues called ‚forums.‛ The
ICT cluster had three such forums, for mobile technologies, software, and electronics(the NCEM forum). The biocluster had a bio-forum, the wellness cluster a wellness
forum, the environment cluster an eco-forum, and the contents and media cluster amedia forum, each used for specific cooperative projects. The mobile forum – the firstto be organized, along with the software forum, in 1996 – went on to build aninternational network. Participating in its work was the Center for WirelessCommunication, founded in 1995 under the guidance of the director of theTelecommunication Laboratory at the University of Oulu’s Department of ElectricalEngineering. By preparing a testing environment for ‚Octopus,‛ a mobile application,
the mobile forum not only promoted innovation by local actors but also madeparticipating in the forum more appealing to those outside the region.
The Oulu Growth Agreement resembled the regional policy of the 1990s in that thebusiness community was involved from the earliest planning stages, and also in that, in
addition to having specific numerical targets, it was designed so that results for eachyear would be confirmed in the annual report. Numerical goals were set at theplanning stage for the creation of 150 new companies and six thousand new jobs, aswell as 1.5 billion euro in increased sales. The planners envisioned that 310 million
euro would be needed to get the project off the ground. Of this amount, they planned
to obtain 180 million euro from public sources, including the EU, and 130 million euro
from the private sector (for example, private contributions to joint research anddevelopment projects). In this way, the project was supported by a firm commitment
from the business community from the start.
In FY 2006 the Oulu Growth Agreement was approaching its final year. Concrete
results were yet to be tabulated, but fundraising, at least, was close to meeting theinitial goals. Discussions have begun on a project to succeed the agreement.

108

Table 4-1

Outline of the Oulu Growth Agreement
Contents of the Agreements

Participating
regionOulu region

Period2002-2006 (announced February 2002)

Implementation

Participation by local companies in Oulu COE Program.

structure

7 forums: Mobile, NCEM (Electronics), Software, Media, Wellness,
Bio-industry, Environment; coordination by City of Oulu
* IT cluster: participation by 3 forums: Mobile, NCEM, Software

Objectives

Strengthen Oulu’s position as a global Center of Excellence
Enhance the competitiveness of the Oulu region
Develop and strengthen Oulu’s growing companies
Create new employment and business opportunities
Diversify Oulu’s high-tech industries
Utilize EU funds

Numerical goals

150 new companies (companies in 2002: 780)

(2002-2006)

6,000 new jobs (jobs in 2002: 14,700)
1.5 bn euro in increased sales (sales in 2002: 3.7 bn euro)

Total budget

Public funds: 180 million euro(2002-2006)

Private funds: 130 million euro
Total: 310 million euro

Constituents

5 industrial clusters:
IT (information technology),
Wellness (health and welfare),Bio-industry,
Environment,
Contents & Media
2 support programs: Business Development, Logistics

Source: Oulu City homepage (http://www.oulu.ouka.fi/kasvusopimus/english/index.html).

109

Table 4-2
ClusterIT

Contents &Media

Cluster Programs under the Oulu Growth Agreement
Scale (2001-2002)(Units: No. of companies,
million euro, persons)

Objectives
Develop the telecommunications sector,
especially wireless technology
Globalize the software industry
Strengthen the fields of precision- andnanotechnology
Enhance the competitiveness of IT
industry in northern Finland
Expand the activity areas of traditional
media
Promote cooperation between traditionaland new media
Use and develop multichannel
communications
Promote international networking

Companies: 261→259
Sales: 3,425→3,128
Employed: 8,379→8,467

Companies: 314→325
Sales: 127→131
Employed: 1,289→1,289

Wellness

Develop wireless communications
Companies: 134→239
technology for hospitals
Develop programs and services for health
Sales: 245→224
maintenanceUtilize IT for exercise monitoring
Employed: 3,599→3,718
Create new business opportunities

Bioindustry

Identify biomolecules
Work on bioprocesses
Develop agricultural and botanicalbiotechnologies
Promote bioindustry

Companies: 20→22
Sales: 25→27
Employed: 234→257

Develop new methods for water
Companies: 31→32
treatment, recycling and sludge treatment
Enhance technologies for exhaust gas
Sales: 174→189
cleansingEnvironment Promote advancements in the collection
and recycling of electric and electronic
Employed: 974→997
appliancesWork on renewable energy and energy
conservation
Companies: 760→777
Sales: 3,996→3,699
Employed: 14,475→14,728

Total, 5 clusters

Source: Oulu City homepage (http://www.oulu.ouka.fi/kasvusopimus/english/index.html).

110

② Structural Change in Local Actors
Entering the new millennium, evidence of structural change could be seen among local
actors, particularly in the City of Oulu. In 2000, the City of Oulu and ten of its
surrounding municipalities formed the Oulu Regional Business Agency as a means ofintegrating their support for business. The new organization is located in the
Linnanmaa Technopolis. Dedicated staff concentrate on one of several specific fields –construction and transportation, chemicals, lumber, services, women entrepreneurs,
tourism and handicrafts. Support is provided to managers and entrepreneurs ofhigh-tech and other firms, in principle free of charge. The Start Business Center, an
incubator, was founded +at the same time.
Oulu Innovation Ltd., which opened in 2005, also deserves a few remarks. In addition
to coordinating the COE (Center of Expertise) program – a job that previously had
belonged to the Technopolis Corporation – and overseeing the work involved in the
Oulu Growth Agreement, this organization links various regions and clusters, mostly
in northern Finland, into the ‚Multipolis Network,‛ the aim of which is to spread
Oulu’s success throughout all of northern Finland.

4.4 Verification of the Working Hypothesis
4.4.1 Verification of the Five Formative Processes
I have now described the initiatives taken by the principle local actors in aroughly-drawn time sequence. My focus has fallen on the moves made in each period
by activity groups aiming at the formation of an ICT cluster, and on steps taken by the
corporations which are the foundation of an industrial cluster. If some corporate
initiatives have little connection with the work of the activity groups, others appear tohave a very strong connection indeed.
In the following, I use the ICT cluster in the Oulu region to verify the working
hypotheses on the formative mechanisms of high-tech industrial clusters. As describedin Chapter 3, I divide the formative period into the foundation period and thedevelopment period. Five principal formative processes occur in sequence during thefoundation period:
I.

Improvement of the environment for innovation;111

II. A growing agglomeration of firms;
III. The emergence of anchor firms;
IV. Improvement of the entrepreneurial environment; andV. Establishment of a reputation.
Mutually enhancing causal correlations exist among the various formative processes,
resulting in the cluster building momentum during the development period which
follows. Taking each process in turn, I shall now examine whether the working
hypothesis can be verified in the formative processes of the Oulu ICT cluster. I shallfirst consider the foundation period, which starts when the formative processes have
hardly begun and continues to the point where all five processes are moving forward,
and establish a rough order for these processes that accords with the order adopted forthe working hypothesis.
(1) Improvement of the Environment for Innovation① Founding of the University of Oulu and Changes in Fields of Research
The Oulu ICT cluster began its formative process in 1958, with the founding of the
University of Oulu – although a more accurate date might be 1965, when the university
launched its Department of Engineers. Prior to the university’s opening, electronics andother ICT firms were almost unknown not only in the Oulu area but in all of northern
Finland. It was only after the founding of the university and the VTT Electronics
Research Laboratory that electronics companies began moving into the region or
starting up there. Joint research with the university and VTT, and the hiring of people
trained there, enabled electronics firms to establish a base of operations in the Oulu
region. Nokia’s transfer of its mobile phone division to Oulu in the winter of 1973 may
not have been directly connected to the university’s existence, but its subsequent
expansion of both the scale and content of its business in Oulu, and its stepping up of
research and development work there, was firmly linked to training and researchcarried out, sometimes in tandem with Nokia, at the University of Oulu, Oulu
Polytechnic (the Institute of Technology and the Raahe Institute of Technology), andthe VTT Electronics Research Laboratory. Technical training schools had existed innorthern Finland before the university opened its doors, but none were capable ofeducating engineers. In the mid-1980s, when the ICT cluster was starting to take shapein earnest, the number of engineers trained at the University of Oulu reached into thehundreds, even counting only those who were graduates of the Department of112

Electrical Engineering. A critical point had been reached in terms of the accumulationof engineers.180
Technopolis Corporation CEO Pertti Huuskonen viewed the founding of the Universityof Oulu as ‚the most rational regional policy of the last one hundred years,‛181 astatement that could equally point to the creation of the Oulu ICT cluster.
The arguments set forth in the following are based on the thesis that the establishmentof the University of Oulu, and the creation in 1965 of its Department of ElectricalEngineering, marked the starting point for the formative process of Oulu ICT cluster.
② Invitation and Establishment of the VTT Electronics Research Laboratory
We have seen how, to a large extent, it was the dedication of people from the
University of Oulu and others in the region that caused the VTT Electronics ResearchLaboratory to locate there. This outcome would have been unlikely without thepresence of the university. Though the university had presented it with a proposal182,
VTT was also considering locating in Kajaani, another city in northern Finland(according to contemporary sources, the two cities differed little in terms of industrial
agglomeration183). In the end, the deciding factor in choosing Oulu was the presence of
the university, where, even then, high-quality research was being pursued in theelectronics field. Named as director of the new VTT Electronics Research Laboratory
was Matti Otala, the first professor affiliated with the university’s Applied Electronics
laboratory. In his new post Dr. Otala would oversee research in fields more closely
connected to practical needs than those which concerned him at the university.
Especially at the outset, therefore, the VTT Electronics Research Laboratory depended
to a great extent on the University of Oulu for its viability, while at the same time
providing the university with valuable support. The relationship was mutually
beneficial: each institution served to ‚improve the environment for innovation‛ whilestrengthening the foundations of the other.
In fact, Dr. Oksman was of this opinion (interview with Dr. Oksman). Although manysuch people were working in Southern Finland at the time, some returned to Oulu as
opportunities for finding work there improved.
181 Mika Kulju (2002), p. 193.
182 Seppo Leppävuori, acting professor for Dr. Otala at the time.
183 Interview with Prof. Juha Lanning (currently director of the Department of Electricaland Information Engineering, University of Oulu). Kajaani, however, was home to Kajaani
Electronics, a leading electronics company which came into being as a result of joint
research with Dr. Otala (and could be considered a product of the university).
180

113

Many of the people who trained or worked at the VTT Electronics Research Laboratory
went on to join existing businesses or start new ones.
In this way, the VTT Electronics Research Laboratory occupied a middle region in theinnovation framework of the Oulu region, linking research conducted at theuniversity184 with corporate R&D. It also, however, functioned as a hub in promoting
the flow of technical talent between different fields of research.
③ Improvement of Physical Infrastructure
I shall now consider Technology Village (the Technopolis) in light of improvements
made to the physical infrastructure in order to enhance the environment for innovation.
As it provided a site in which multiple companies could locate, Technology Village
promoted the agglomeration of firms (process II). And, since it included incubators(established in Technology Village in 1987), it was effective in improving theentrepreneurial environment (process IV). Perhaps most important, the completed
Technology Village, as a science park adjacent to the University of Oulu and the VTTElectronics Research Laboratory, offered an environment highly conducive to that
union of technology and know-how that constitutes innovation. These two institutions
made immeasurable contributions to the science park’s development185, and thus wecan accurately trace its origins to the founding of the university.
The original site of Technology Village was, as I mentioned earlier, a refurbished dairy
plant in the central city. In 1985, according to plan, construction of new buildings began
on city-owned land adjacent to the university. After the VTT Electronics ResearchLaboratory was established in 1974, it, too, occupied a number of different sites (first at
Kantingangas, later in rented rooms at Kemira’s research laboratory)186 before its new
facilities in Linnanmaa were completed in 1989. Since these also abutted Technology
Village, there now existed a concentration of academic institutions, research facilities
and commercial land in one spot. One outcome of this was progress in improving theenvironment for innovation, in the sense that it was now easier for local actors to
In the case of the Engineering Faculty of the University of Oulu, and especially in the
Department of Electrical Engineering, the university itself focused its research on fields
closely connected to companies’ needs.
185 While the University of Oulu may have been capable of developing a science park on its
own, the contribution of the VTT Electronics Research Laboratory brought huge advantages
in terms of improving the environment for innovation.
186 Mika Kulju (2002), p. 68.
184

114

engage in cooperative work. Personal networks187 had, of course, existed in Oulu prior
to this, and local actors had used them when collaborating. But conditions clearly
improved with the construction of Technology Village. Progress also was made inestablishing a reputation (process V) as the entire region became associated with ‚Oulu,
City of Technology.‛188④ Creation of an Institutional Infrastructure
Technology Village was a form of physical infrastructure intended to produce
innovation. Its third-sector manager, Technology Village Corporation, was committed
to providing high-tech firms with whatever support they needed, and thus it may beseen as a form of institutional infrastructure. One should keep in mind that not allscience parks share this corporate philosophy. Technology Village Corporation’s
management of the park coexisted in complete harmony with the City of Oulu’s
industrial policy, and the city’s promotion policy for high-tech industry, begun in the
1980’s as ‚The City of Technology: A Strategies for Economic Development,‛ in largepart supported the corporation’s work. Indeed, the ‚city of technology‛ catchphrase
was used by Technology Village Corporation itself. One of the city’s policies was toplace a liaison officer at the University of Oulu (for a period of three years from 1986),
with the city paying the cost. Other than firms which essentially were products of theuniversity or which employed many of its graduates, most local companies at the time
had little idea of how to form a partnership with an academic institution, even if they
were interested in doing so.189 At the University of Oulu, too, and especially in the
Department of Electrical Engineering, the idea of cooperating with private firms was
attracting growing interest – but the university as a whole had yet to take any concrete
steps toward that end. It was to remedy this problem that city government employees
Paavo Similä and Seppo Mäki decided to place a liaison officer at the university at thecity’s expense. The first to take up the position was Raimo Kuismin, a construction andcivil engineer with extensive connections to local industry.190 After three years of city
funding, financial responsibility for the liaison officer system was turned over to the
These included a network of people with ties to the University of Oulu’s Department ofElectrical Engineering and a network, called the Revontuliryhmä (the “Aurora Group”) ofindividuals involved with high-tech firms and other organizations. The latter, which existed
at least since the late 1970s, included from Nokia and Polar Electro as well as key local
actors from organizations such as the VTT Electronics Research Laboratory and the
University of Oulu. (Email from Mr. Möttönen, April 10, 2006.)
188 Soviet President Gorbachev, for example, visited Oulu in 1989, the same year that theVTT Electronics Research Laboratory and other leading actors converged in Linnanmaa.
189 Interview with Paavo Similä.
190 Interview with Seppo Mäki.
187

115

university according to Similä’s original plan. The idea first saw light as an element of
the city’s economic development program of 1983. In 1984, a project team wasinaugurated to implement the plan; in 1988, when the project period ended, the systembecame a permanent part of the city government as the Economic Bureau. At the outset,
the bureau’s principal work consisted in the further development of the City ofTechnology. In the sense that they enriched the area’s institutional infrastructure, City
Hall’s new measures and structural overhauls led to a better ‚environment for
innovation‛ in the Oulu region.
⑤The Presence of ‚Fool Kings‛
Petri Pulli191, a professor at the university’s Department of Information Processing, hassaid that investment in next-generation technology is necessary if one’s own system isto prevail over one’s competitors, but because of the uncertain nature of developmentin this field, one cannot obtain such investment without a generous provider of capital,
which he calls a ‚fool king.‛ The presence of a fool king creates an advantageous
environment for the development of next-generation technologies.
Finland began research on military radar during the Second World War. When the war
ended, concerns about preparedness for a possible Soviet threat inspired the country’s
Ministry of Defense to pursue further research into radar and wireless communications
systems. While the research initially targeted military applications, in the mid-1960s it
was noticed that some technologies could have non-military uses. 192 Moreover,Finland’s telecommunications market was unusual in that numerous competingbusinesses operated in coexistence with Post and Telecommunications, a public
corporation which, large in scale and rich in capital, could use its governmental status
for the benefit of private companies in the country’s telecommunications system.
Against this background, after World War II, and particularly during the period from
While at the VTT Electronics Research Laboratory, Pulli was a key player in thefounding of Cybelius, a CCC subsidiary which, with CCC and the University of Oulu,
conducted joint research on virtual design simulation software.
192 In 1963, Finland’s Defense Ministry announced it would be holding a contest for thedevelopment of wireless telecommunications systems for military use. In the end the contest
was cancelled, but the prospect sparked development by firms including Finland Cable
Factory (later to become Nokia), the television manufacturer Sarola, and thegovernment-run Televa. One result was progress in Finnish technology for company radios(wireless communication systems for use within companies); individual firms foundcustomers among police forces, coast guard services, and the national railway, among others.
(Mika Kulju [2002], p. 78; Staffan Bruun, Mosse Wallen [1999], pp. 83-84 of Japanesetranslation; email from Lauri Kuokkanen [March 25, 2006]).
191

116

the 1970s until Finland’s accession to the European Union in 1995, the Ministry of
Defense and the Post and Telecommunications Corporation served as ‚fool kings‛ for
Finland’s wireless telephone businesses and, since the 1980s, for Nokia. In
consideration of national regional policy, Oulu received a certain portion of capital andachievements from these ‚kings,‛ especially from the 1970s on. Specifically,(1) In the 1970s the Finnish Ministry of Defense held a contest for the development of
wireless telephones for military use. Nokia ultimately won the contract, but
because it of conditions placed upon its commercialization (by means of licensed
production in the United States) and development (in the North, East and otherareas), Nokia’s production of military-use wireless telephones took place in Oulu
for only two years, 1972 and 1973.193(2) Since the 1980s, all of Finland has used the NMT (Nordic Mobile Telephone)first-generation mobile telephone system. The Post and Telecommunications
Corporation served as the ‚fool king‛194 during the development period for the
NMT analog system starting in 1978, but Oulu was responsible for thedevelopment and production of the base station system.
(3) In the late 1980s, the Ministry of Defense supplied the university, Nokia andElektrobit with funds for the research and development of CDMA (Code Division
Multiple Access) technology in Oulu.195
Oulu was fortunate enough to obtain these benefits because it had focused since the1970s on the research and production of wireless telecommunications systems; thatthey helped to build an environment conducive to innovation is without question.
Other essential factors in this mix were, of course, the University of Oulu, the VTTElectronics Research Center, and especially Nokia, which, in combination with theother two, vastly enriched research and production in the Oulu area.
(2) A Growing Agglomeration of Firms
Corporate actors, either newly established or operating in an expanded range ofactivities, helped set the stage for the events which worked to improve theenvironment for innovation in the Oulu region. I shall discuss these now in order ofMika Kulju (2002), p. 80; interview with Dr. Oksman.
Interview with Petri Pulli.
195 Interview with Eero Vallström.
193
194

117

their importance.
① Establishment of Nokia in the Oulu Region
Nokia’s transfer of its wireless telephone division to Oulu in 1973 was the result of abold decision by Björn Westerlund, president of the Nokia group, in view of thegovernment’s policy of drawing industry to ‚development regions,‛ such as thecountry’s North and East, as well as the presence in Oulu of a Nokia cable plant. For
Oulu, having Nokia bring in its wireless telephone division was, as Lauri Kuokkanen
put it, ‚like winning the lottery.‛ In 1976, Nokia started manufacturing modems and
PCM equipment at its Rusko plant in Oulu. Development and production of NMT
analog base systems began in 1979, followed by the development of embedded mobile
phone software in 1985 and basic research and development of CDMA for
third-generation mobile phones in 1987.
Figure 4-16

Number of Nokia Employees in Oulu

5000
Other

4500
4000
3500

Development ofswitchboard software

3000
2500

Development of software
for mobile telephones

2000
1500
1000

Rusko (R&D, productionof mobile telephone basestations; other)

500
0
1978

1990

2000

Data for Figure 4-16
Calender Year
Rusko (R&D, production of mobile telephonebase stations; other)Development of software for mobile
telephones
Development of switchboard software
Other
Total

Source: Interview with Eero Vallström.

118

1978

1990

2000

330

700

2200

0

100

1500

0
0
330

100
100
1000

500
500
4700

Several things prepared the way for Nokia to expand its R&D-based business in Oulu.
These clearly would include the training programs given at the University of Oulu, theInstitute of Technology and elsewhere, and the strengthened ties forged by joint
research projects involving the university, the VTT Electronics Research Institute, andNokia. This view is amply corroborated by people at the University of Oulu196, theInstitute of Technology, and the VTT Electronics Research Institute, and also by Erkki
Veikkolainen of the former Nokia Mobira. We can conclude that Nokia’s putting downroots in Oulu owed a great deal to the engineering education offered by the university
and the Institute of Technology, research conducted there in related fields, the founding
and enhancement of the VTT Electronics Research Institute, and the improved
innovation environment exemplified by the creation of Technology Village.
② Emergence of Polar Electro
Polar Electro was founded in the late 1970s, when conditions for startups wereimmature, not least in respect of capital. Nevertheless, the company managed todevelop into such a strong exporter that it not only made Oulu’s name as a ‚city oftechnology,‛ but served as an ‚angel‛ for other firms in the Oulu region. Seppo
Säynäjäkangas, the company’s founder, taught entrepreneurship for many years at the
University of Oulu and was a role model for graduates who were prospective
entrepreneurs. His impact on other companies and entrepreneurs was enormous.
Having started life at a time when the entrepreneurial climate was barely developed,
Polar Electro was, in a sense, a ‚mutant197,‛ its rapid growth fuelled by an ability tocreate markets outside its own region. That the firm could accomplish so much198 is
Dr. Oksman says the following about the relationship between Nokia and Oulu: “I think
we can say it was a mutually beneficial relationship. During the latter half of the 1980s,
when Nokia’s workforce was soaring, five to six hundred people graduated from theuniversity’s Department of Electrical Engineering. This stock of human resources is very
important to a region, so the timing could not have been better. Starting in 1982, Nokia
began to produce base systems in Oulu on a full scale. Research and development work on
CDMA technology for third-generation mobile phones took off in the middle of the same
decade, also in Oulu. Researchers were needed, and Oulu could provide them. Nokia wasglad to hire the young people from the university who were working in that field. Both thecompany and the university profited from the relationship.”197 I use this expression as Osama Yamada of Nippon Technology Venture Partners, who
handled GP business for the first investment partnership in Ichiba, Tokushima, used it toexplain the appearance of Dell Computers in the city of Austin, Texas, to an interviewer on
December 16, 2005. Dell Computers was founded in Austin in 1984, when, thanks to efforts(in 1983) to attract MCC and other companies, high-tech firms and engineers werebeginning to accumulate in the city. In a short span of time the firm created huge demandoutside the Austin area and grew rapidly into a major brand.
198 In addition to the reasons outlined here, an important factor was the presence of Nokia,
which was actively opening up foreign markets at that time. Mr. Möttönen, Polar Electro’s
196

119

attributable in part to Säynäjäkangas’s background and personality, which I discussed
earlier, and his years at the University of Oulu under the tutelage of his mentors Dr.
Oksman and Dr. Otala. Its technological development, however, has a great deal to dowith the founder’s having been an active instructor at the university, a member of thefirst class graduating from the Department of Electrical Engineers who went on toacquire a doctorate and teach there. Students from his research lab took part in theactual development of technologies.199 For all of these reasons, Polar Electro can beconstrued as a product of the University of Oulu, its birth a result of the founding of
the university and its Department of Electrical Engineers (I: Improvement of theEnvironment for Innovation).
③ Emergence of Kajaani Electronics
This, too, could not have happened without the strong message sent to northern
Finland’s future electronics industry by Dr. Otala when he was invited to teach at the
University of Oulu. Mika Kulju (2002) relates that Kajaani’s chairman, intrigued by Dr.
Otala’s message, telephoned the latter at his home one day in 1968. Some thirty
minutes later he went to meet him for the first time, and two hours after that he hadconceived the idea that would become Kajaani Electronics. Kajaani had, of course, been
seeking means of diversifying, but Dr. Otala was clearly the force which drew it into
the electronics field in Oulu.200 Were it not for the founding of the University of Oulu
and its Department of Electrical Engineers (I: Improvement of the Environment for
Innovation), it is most unlikely that the move would have been made.
④ Expansion into Electronics by Rautaruukki Corporation, a Raahe Steelmaker
Rautaruukki is another established firm that moved into the electronics field in
northern Finland. Its expansion from steelmaking into electronics helped pave the way
for firms such as Fincitec, a custom IC designer founded in 1986, and Idesco, a makerof IC cards and access control systems founded in 1989. As in the case of Kajaani, theestablishment of the University of Oulu and its Department of Electrical Engineers wasa fundamental background event (I: Improvement of the Environment for Innovation).

vice president, says that Nokia set a good benchmark for the firm as it sought to expand
internationally during the 1980s.
199 Mika Kulju (2002), p.95.
200 Although Kajaani moved its electronics division 180km from Oulu to Kajaani in the
1970s, some of the division’s businesses returned to Oulu during the 1980s. In a broad sense,
therefore, Kajaani can be considered a member of the Oulu ICT community. (Bascom, Jutel,
and Metso Automation all moved into Oulu at the decade’s end.)120

Elektrobit, JOT Automation, CCC, and NetHawk are representative examples ofhigh-tech firms created in Oulu. These are discussed in the chapter on anchor firms as
they are closely connected with Nokia’s assuming that role.
The growth of two firms established by Lauri Kuokkanen – Lauri Kuokkanen Oy in1978 and Solitra Oy in 1986 – appears to owe virtually nothing to an ‚improved
environment for innovation.‛ Rather, the firms’ success was due almost exclusively to
Mr. Kuokkanen’s own abilities and the growth of the mobile telephone business innorthern Europe – the latter furthered to some extent by Mr. Kuokkanen’scontributions. Solitra, however, did benefit from the growth of Nokia’s base station
business in Oulu.
(3) The Emergence of Anchor Firms
We have seen how the events encompassed in process I, ‚improvement of theenvironment for innovation,‛ took place only after the emergence in Oulu of firms andbusinesses hitherto unknown in the region (process II, ‚growth in the agglomeration offirms‛). The third process to take place, the ‚emergence of anchor firms,‛ isparticularly important to the formation of a high-tech industrial cluster. The term
‚anchor firm‛ is used herein to mean ‚a firm which brings a significant amount ofdemand into a cluster from outside the region, and which orders a certain amount ofbusiness from other firms within the cluster.‛ As this definition makes clear, in order tobe considered an anchor firm a company must not only draw in demand from outside
the region, but also create (procure) work within it. One form of business that would
not qualify, for example, is the branch plant system, in which companies bring in raw
materials from outside the region and use low-cost labor to process them within it. If a
company is to become an anchor firm, both the firm itself, which produces work, andthe subcontractors which accept it must actually be growing or be poised for growth.
When an environment has developed that makes this possible, companies which
produce work take on the character of anchor firms. As I discuss in more detail later on,
the emergence of anchor firms serves to enrich the industrial ecology, making it easierto create the kinds of companies that fill in ecological gaps. This prepares the way forprocess IV, ‚improvement of the entrepreneurial environment.‛ Here, we shall look atprocess III, ‚emergence of anchor firms,‛ in its connection with the founding andgrowth of start-up firms as a product of process IV, ‚improvement of theentrepreneurial environment.‛
121

In the Oulu region, Nokia is the largest of the companies which have qualified asanchor firms since the latter half of the 1980s. Following Nokia, though far smaller inscale, is Polar Electro; smaller still are several independent high-tech firms spun off
from Kajaani’s electronics division. I shall now trace the development of Nokia andPolar Electro into anchor firms.
① Nokia’s Development into an Anchor Firm and the Growth of Elektrobit, JOT
Automation, CCC, and Solitra
Nokia’s establishment of a high-tech business hub in Oulu began in earnest in 1973,
when the firm moved its wireless telephone division to Oulu from the Helsinki area. It
went on to bring other functions, such as modem and PCM equipment manufacturing,
into Oulu. Nokia began to develop base station systems in Oulu in the late 1970s and to
produce them there in the early 1980s. Later in the 1980s, Nokia chose Oulu for thedevelopment of embedded software for mobile telephones and research on CDMAtechnology for third-generation mobile phone systems. In terms of business volume –export to other regions and the creation of added value – Nokia Telecommunications(since 1999, Nokia Networks) ranked highest in both the development and the
production of portable base stations; Oulu was in fact the home base of these twodivisions. Eero Vallström201, who led the base station division from 1984 to 2002, was a
graduate of the Institute of Technology. Referring to Nokia’s role as Oulu’s anchor firm,
he has this to say about what he calls the region’s ‚driving business‛:
Everyone has a different opinion on the reasons for Oulu’s success. In my view,
much of it is due to the existence of the University of Oulu, which has supplied
the area’s businesses with a steady flow of talented personnel. Also very
important has been the presence of Oulu’s driving business, Nokia, which cameto the region in 1973 to manufacture wireless telephones. In 1979, Nokia beganwork in Oulu on the development and production of base stations using NMT
analog networks. Its business scale then represented only 1% of the global
market, but it was growing steadily. In 1984, Nokia moved into the world
market in that field and growth really took off. (According to Vallström, as of2000, Nokia’s share of the global base station market had reached 25%.) Third
In 1984, at the age of 29, Vallström became the company’s general manager, taking
charge of the Rusko works and overseas marketing for base station business. Nokia’s basestation business enjoyed steady growth, requiring Vallström to spend up to 150 days per
year on business journeys.
201

122

and finally, there were some additional factors that were particular to Oulu,
such as the presence of Technology Village and a culture that was not averse toa challenge.
Embedded software development by Nokia Mobile Phones – started in 1985 with aminiscule staff of three – was vital to the growth of hi-tech firms originating in Oulu.
As we have seen, Eero Vallström, who led this division, was a 1980 graduate of theuniversity’s Department of Electrical Engineering. He joined Nokia (then Nokia
Mobira) in 1985, after a period spent researching embedded software with the VTTElectronics Research Laboratory. The idea of developing a community of high-techcompanies in Oulu had been with Walstrom since the beginning of his time with Nokia.
Losing no time in putting his scheme into practice, he wrote an article for a local
newspaper stating that Nokia was looking for subcontractors. The stage was thus set
for the founding of Elektrobit202, which grew into the very model of an Oulu-bred,
listed electronics firm, and CCC, now one of Finland’s leading software companies. As
Oulu’s anchor firm, Nokia provided work for high-tech companies in the region,
preparing the groundwork for their later growth. In Eero Vallström’s words,
Elekrobit, CCC, and NetHawk all grew as subcontractors of Nokia. Theirdependence on Nokia has fallen since then – these days it stands at 35%, 10 to
40%, and 30% respectively – but during their start-up periods practically all of
their sales went to Nokia.
Jouko Möttönen, a vice-president of Polar Electro, with a career in Oulu’s private sector
dating back to the 1970s, has similar views:
Nokia numbered a great many firms in Oulu among its suppliers andsubcontractors, including Elektrobit, JOT Automation, and CCC. Nokia had
wanted very much to establish such a network. There is no question that thispolicy gave many companies a chance to grow. I don’t believe there were manyspinoffs from Nokia, however. NetHawk was one of Nokia’s (few) spinoffs.
From around 1990 on, jobs subcontracted by Nokia accounted for a good
proportion of the sales of companies like these. Without Nokia, none of them
could have achieved their present growth. (Addition in parentheses is the
Elektrobit’s listing was a result of its merger in 2002 with JOT Automation, which had
been listed since 1988.
202

123

author’s.)
Figure 4-17 shows transitions in Elektrobit’s sales figures. Sales began to take offaround 1993 and grew by large margins through 2002, the year of the firm’s merger
with JOT Automation. This pattern was consistent with that for the growth of Nokia’s
total sales (Figure 4-18), which started around 1992 or 1993. Sales figures for Net Hawk
(Figure 4-19) begin to improve in the mid-1990s, suggesting that its growth, too, wassupported by that of Nokia. One must remember, however, that, as Eero Wallstromsaid, these companies may have consolidated, and grown, as Nokia subcontractors, butthey now depend on Nokia for only one-third of their sales. In the intervening years
they worked hard, both at home and abroad, to establish themselves as independent
high-tech firms. Just as Nokia provided a good benchmark for Polar Electro when thelatterwent

international 203 ,

these

firms

learnedandwereinspiredbythe experiences of Nokia, Polar Electro and other regional companies which had
preceded them into the international arena. It would not be too much to say that Nokia
served as the springboard for these companies’ consolidation and growth.
Nokia’s connection to Solitra also bears mentioning, though the relationship issomewhat different from those it has with such Oulu firms as Elektrobit. Founded in
1986, Solitra owed much of its growth to Nokia’s expanding base station business.
Lauri Kuokkanen, having presided over the development and production of duplex
communication channels at Lauri Kuokkanen Oy, the company he had founded in 1978,
had made an invaluable contribution to Finland’s mobile telephone industry.
Displeased with his firm’s increasing size, however, Kuokkanen sold his entire stake toNokia and launched Solitra. The new firm embarked on the development andproduction of parts for Nokia’s base station division, just then enjoying its first wave ofgrowth. Lauri Kuokkanen was not only a talented engineer, but also an astutebusinessman, and in this case his timing was perfect. Solitra went on to prosper as oneof Nokia’s top developer/subcontractors. Ultimately, Kuokkanen felt this firm, too, wasgrowing too large, and sold off his shares in 1993. Ownership went to two American
firms in succession, ADC and Remec. Today, Solitra continues to operate in Oulu.
For any number of high-tech firms originating in Oulu, the expanding scope of Nokia’s
activities, coupled with the increasing scale of its business in general and its basestation division in particular – in other words, the emergence of Nokia as Oulu’s
203

Interview with Jouko Möttönen.

124

anchor firm – was instrumental in setting the groundwork for growth.
Figure 4-17

Sales Trends at Elektrobit

250

Millione Euro

200

Merger with JOT
Automation(2002)

150

100
Founding of Elektrobit(1985)

50

Year

Source: Elektrobit.

Figure 4-18

Sales Trends at Nokia (Company-wide)

Source: Nokia website (http://www.nokia.com/A402756).

125

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

0

Figure 4-19

Sales Trends at NetHawk

35
Purchase of
Ipnetfusion (2005)

30
Purchase of
Kaskitech (2000)

Million euro

25
20
15
10
5

Founding of
NetHawk

0

Year

Source: NetHawk.
② Polar Electro and Other Firms
While a far smaller company than Nokia in terms of sales, Polar Electro has indeed
brought a substantial amount of demand into the region over the years. Jouko
Möttönen, Polar Electro’s vice president, has this to say about his company’s role as ananchor firm:
Polar Electro used companies like Fincitec and Elektrobit as subcontractors; so,in this sense, we can probably call Polar Electro an anchor firm. And, since it
collaborated in a large number of research projects with a local rehabilitation
hospital, the Merikoski Rehabilitation and Research Center, Polar Electro wasalso an anchor firm for the wellness and health cluster. It was rather small,though, for an anchor firm.
In addition to functioning as an anchor firm, Polar Electro has played an important role
as a business angel in the ICT and wellness fields, as I mentioned earlier. Company
founder Seppo Säynäjäkangas was a key role model for starters of university-launched
ventures and in the 1990s functioned as spokesman for Oulu’s regional strategy to126people outside the area. All things considered, Polar Electro has played a multifacetedrole in the creation of the Oulu ICT cluster, particularly in relation to the scale ofdemand (about 200 million euro) it has brought in.
(4) Improvement of the Entrepreneurial Environment
The phenomenon described in the previous chapter - the emergence of anchor firms,
along with the growth of a number of other hi-tech enterprises – is the aspect mostfundamental to enriching the ‚industrial ecology‛ which is the entrepreneurial
environment. Entrepreneurial environments in general, and those for high-techstart-ups in particular, offer incubators, business support services for start-up firms,
and risk money and other forms of capital. These functions have played significant
roles in the Oulu region.
① Oulutech and TeknoVenture
On its founding in Oulu in 1982, Technology Village Corporation made support for
high-tech firms its corporate philosophy. This may have been a reason why Oulu wasamong the first areas to work on improving its entrepreneurial environment. However,an interview survey found that most recipients of support from Technology Village
Corporation felt a lack of organization, as services (such as the introduction ofcustomers and the proposal of ideas) tended to be provided on an individual level by
whoever was in charge. In the 1980s, the Oulu city government and Technology Village
Corporation acted as one. The city government was a prime mover in many sorts ofimprovements, especially in the institutional sphere. But an institutional framework
had yet to be developed for the provision of organized, comprehensive support tocompanies and entrepreneurs.
At what point, then, did signs of such an institutional framework appear? Not until the
mid-1990s, with the founding of Oulutech. Oulutech opened its doors in 1994,
capitalized by Technology Village Corporation (30%), a University of Oulu fund (30%),
and SITRA (40%). Technology Village Corporation was responsible for the rental ofspace, so firms did not have to concern themselves with that aspect. Oulutech, however,was created to be a specialized provider of every other type of incubating service.
Stressing areas such as the commercialization of new technologies and support for
high-tech start-ups, Oulutech employed specialists to deal with each field of technology,
helping start-ups prepare business plans, evaluate and transfer technologies, protect
127patents and technologies, organize finance204, find sales networks and hire managers
and specialists. The support that Technology Village Corporation had provided on a
individual, piecemeal basis now was systematic and complete.
One of the people Oulutech turned to for risk money was Seppo Säynäjäkangas, who
had founded Polar Electro in the mid-1980s and now, with his firm, was beginning to
act as an investor. KERA (now Finnvera), a government regional development bank,also began offering positive support to start-ups at about this time.205 Technoinvest Oy,
a venture fund specializing in the provision of risk money, was established in 1988;
undercapitalization (at 10,000,000 Finnish marks), however, prevented it fromperforming as hoped. Taking a lesson from Technoinvest’s experience, the venture fundTechno Venture opened in 1994 – the same year as Oulutech – having spent two or
three years on the fund’s preparation. Techno Venture targeted companies in the northof Finland, primarily in the Oulu area. The government-affiliated KERA supplied
somewhat over 40% of the necessary investment; neighboring communities also
supplied over 40%, and SITRA and private financial institutions supplied the rest. The
fund was managed by TeknoVenture Management Oy, established in 1991 byindividual investors and currently the manager of four funds. TeknoVentureManagement has 38.6 million euro in investment capital, made up of its own funds,
other venture capital, and contributions from local governments and financial
institutions. Involved in the establishment of the first of these funds (TeknoVenture, in1994) was Jorma Terentjeff, a graduate of the University of Oulu’s Department ofElectrical Engineering who was instrumental in the development of numerous
electronics companies in the Oulu region. From this regional fund he invested in JOTAutomation and served as its advisor on mergers with similar firms in the south. In
1995 he was named CEO of JOT Automation and guided the firm to its listing on thestock exchange. A representative example of the Oulu entrepreneur, he stepped up to
the company’s presidency and started new regional venture funds. He went on to

For example, TEKES funds for market and business concept surveys and checking on
intellectual property rights (up to 10,000 euros/project); TEKES and SITRA funds for the
preparation of business plans (up to 40,000 euros/project); funds from a seed consortium
including SITRA, TeknoVenture Oy, Okobank and others (up to 168,000 euro/project).
205 Polar Electro Vice-President Jouko Möttönen comments: “(For Polar Electro as aninvestor,) KERA was a key partner that played important roles. The people at KERA
understood entrepreneurs. There were many start-up firms which benefited from KERA’s
support. Start-ups today have a much easier time procuring funds, but in those days it was
really difficult. We shall never forget what KERA did for us.” (Additions in parentheses are
the author’s.)
204

128

create four funds206 in all, with investments in a total of 57 companies, 22 of whichhave already been exited.207② Increase in ICT-related Business Establishments, 1995-2000
We have seen how the ‚industrial ecology‛ developed with the emergence of Nokia
and other companies as anchor firms from the mid-1980s. In 1994, with Oulu now
capable of incubating start-ups and providing firms with risk money, the region’s
entrepreneurial environment had greatly improved. Since it was not possible toconfirm the actual number of business openings, I investigated the number of businessestablishments in the Oulu region operating in sectors related to the ICT cluster (Figure4-20). We see significant increases in the number of business establishments, largely in‚other businesses‛ (including consultancy and professional service businesses
targeting corporations) and computer-related services (such as software), particularly
in 1996 and 1997. Substantial numbers of business openings may be inferred in thesefields after the mid-1990s.
Figure 4-20

Numbers of Business Establishments Operating in the Oulu Region in

Sectors Related to the ICT Cluster(Change from previous year)

120
100
80

Other businesses(including those targeting
corporations)
Computer-related
services60
40
20Electrical machinery
manufacturing
General machinery
manufacturing

0-20

Metal products
manufacturing-40

Manages four funds as general partner with unlimited liability: TeknoVenture Oy (est.
1994, fund capital 15 mil. euros), Lapin Rahasto I KY (est. December 1999, fund capital
3,200,000 euros), Jokilaaksojen Rahasto I Ky (est. November 2000, fund capital 5, 400,000
euros), and four funds of TeknoVenture Rahasto II Ky (est. May 2002, fund capital 15 mil
euros).
207 Email from company president Ilkka Lukkariniemi (November 24, 2005).
206

129

Data for Figure 4-20
(Change in number of business establishments from previous year)
NumberNumberYear in 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 in 2003
Rubber and plastic goods
manufacturing
Metal products manufacturing
General machinery manufacturing
Electrical machinery manufacturing
Computer-related services
Other businesses (including thosetargeting corporations)
Total

11
56
84
82
110

4
1
12
5
3

-2
7
-10
7
12

4
2
14
5
-6

3
4
1
10
14

0
10
1
-4
7

1
1
-4
2
15

-1
-14
-1
4
4

0
9
-1
10
36

0
1
-8
-1
1

0
1
-1
-3
0

20
78
87
117
196

634
977

28
53

13
27

67
86

69
101

15
29

11
26

40
32

6
60

47
40

59
56

989
1,487

Source: Statistics Finland.

(5) Establishment of a Reputation
Numerous factors must be taken into account when judging whether a concentration ofbusinesses has established a reputation as an industrial cluster. These factors may bedifficult to specify, but we can at least say that one necessary condition is a stable,reasonably-sized agglomeration of companies in the field concerned. Other importantfactors include an increase in the number of firms (including start-ups) locating in thecluster as a result of efforts by activity groups, and an overall vitalization of industrial
activity due to the growth of businesses originating in the region. When conditions likethese are in place, the public will begin to see television and magazine reports on theemerging high-tech cluster and conferences will take it up as a topic of discussion. At
this point, the region will have established a fairly widespread reputation as ahigh-tech industrial cluster. Reports on the rapid growth of high-tech firms originatingin the area, and on their being listed on the stock exchange, are particularly effective inbuilding a reputation, especially when numerous such firms appear in sequence. Visits
by foreign politicians and the holding of major international conferences also enhance a
region’s reputation both at home and abroad. In any case, sporadic news reports are
only part of what is needed for a region to earn a reputation as a high-tech cluster. The
major constituents essential to the establishment of a reputation are an increase in thenumber of companies in operation, vibrant industrial activity and innovation.
How does Oulu fare in this respect? It was only in 1975 or so – surprisingly recently –that people began to use the expression ‚the Oulu phenomenon‛208; certainly neither
208

Interview with Dr. Oksman.

130‚industrial agglomeration‛ nor ‚industrial cluster‛ would have described what existed
in Oulu at that time. In all likelihood the term was used to indicate the beginnings of anew phenomenon for Oulu, namely the extraordinary rise of the electronics industry.
In the second half of the 1970s, the University of Oulu’s Department of ElectricalEngineering had already been open for more than ten years. Influenced by Drs.
Oksman and Otala, growing numbers of electronics firms had for several years been
taking root in the Oulu area where none had existed before. The term was evidently inwide acceptance in September 1988, when SITRA published its activity report on
Technology Village Corporation subtitled ‚A Chronology of the Oulu Phenomenon.‛The late 1980s was when Nokia was becoming Oulu’s anchor firm; companies like
Elektrobit, JOT Automation, CCC, and Solitra were developing well in that enrichingenvironment. Technology Village Corporation was expanding its operations at
Linnanmaa, next to the university, and the Oulu city government was promoting its‚City of Technology‛ publicity strategy as part of its larger industrial policy. In thatsense, the industrial cluster was visibly taking shape. However, Oulu had not yet
produced any listed companies, and the institutional infrastructure required for
entrepreneurship remained immature. A great deal of practical work remained to be
done. After the recession-marred first years of the 1990s, Nokia moved quickly toreignite growth through its mobile telephone business; by 1994, with the founding ofOulutech and TeknoVenture, the environment for new business was improving
markedly. In the same year, the Finnish Ministry of the Interior began its COE program
designed to roll out the ‚Oulu model‛ nationwide. The industrial cluster had
noticeably improved in the practical sense, and, with the government’s endorsement ofOulu as a successful example of regional industrial development, its reputation had aswell.209 Later events included the listing on Helsinki’s Stock Exchange of the PKC
Group in 1997, JOT Automation in 1998, and Technopolis Oulu Corporation itself in
1999. Oulu had firmly established its reputation as an ICT cluster. The listing of JOT
Automation and the other firms mentioned brought tremendous assets to local
business people, some of whom began acting as business angels themselves. This
produced yet more risk money for the region, in a positive cycle which further
improved the environment for entrepreneurs (Tables 4-3 and 4-4).

In Japan, Oulu was becoming known among people involved in the Hokkaido cluster, atleast from the mid-1990s. In 1997, members of the Association for Creation of the Hokkaido
Industrial Cluster and the Industrial Cluster Research Association Okhotsk visited Oulu
and initiated a series of mutual exchanges.
209

131

Table 4-3

Major Listed Companies in the Oulu Region (Helsinki Stock Exchange)

Company nameLine of businessYear listed
PKC Group Oyj (est. Wire harness manufacturing and 19971969)
manufacturing services
Incap Oyj (est. 1992) Electronics manufacturingservices (EMS)JOT Automation
Automatic production systems
1
Group Oyj (est.
1988)
Technopolis Oyj (est. Operation of science parks
1982)
Scanfil Oyj (est.
Production systems and EMS
1976; began
operating in Oulu in
1990)
Elektrobit Group Oyj Electrical and electronic(merger by Elektrobit equipment, software, andOy [est.1985] with
automatic production systems
listed firm JOT
Automation Oyj)
Ruukki Group Oyj
Business group investing in(est. 1994)
diverse venture businesses inFinland

1997
1998

1999
2000

2002

2003

Note1: Merged with Elektrobit Oy in 2002, becoming Elektrobit Group Oyj.
Note2: QPR Software Oyj, established in 1991, moved to Helsinki after its listing in 2002.
Table 4—4 Principal Business Angels and Consultants to Hi-tech Firms in the Oulu
Region132

Company nameYear
(Investment company or
establishedconsultants)
1977

Polar Electro Oy

1995

Fortel Invest Oy

Founder

University of
Dr. Seppo Säynäjäkangas
Oulu
Mr. Juha Sipila

1999

Head Invest Oy

Mr. Veikko Lesonen

1999

Acted as individual
consultant

Mr. Tapio Tammi

2000

Avant Management Oy

Mr. Jorma Terentjeff

2000

Acted as individual
consultant

Mr. Raimo Kuismin

2003
2003
2004

Founder’s
previous
position (ex.)

IT-Pilot Oy
Oulu Business Networks
Oy (→became OBN Oy)

Mr. Eero Vallström

MEVita Invest Oy

Mr. Erkki Veikkolainen

Mr. Toivo Vilmi

Remarks
Investments made byboth the company
and Mr. Säynäjä
kangas.

Solitra Oy
Head Invest Oy is anumbrella company
JOT
comprising Winwind
Automation Oyj Oy and other new
firms started by Mr.
Lesonen.
Mr. Tammi works as
Polar Electro
a consultant while
Oy
operating Gamga Oy.
JOTAutomation Oyj
Mr. Kuismin works as
University ofa consultant while
Oulu liaison
operating CadFaster
officerOy.
Nokia Networks
Primarily a businessNokia Networks
consultant.
Nokia Mobile
Phones

One result of an established reputation is feedback. In Figure 4-20 we see how ICTestablishments have increased since the mid-1990s. Overall, the entrepreneurial
environment improved considerably after 1994. With government recognition as amodel region, Oulu had succeeded, to a certain extent at least, in establishing a
reputation. These developments, along with Nokia’s expansion of its local operations,created a fertile environment for the growing numbers of new business establishments
being founded there in the second half of the 1990s. Toward the end of the decade,firms originating in Oulu were listed on the Helsinki exchange for the first time. Bothat home and abroad, Oulu’s reputation was now secure. Technopolis Oulu Oy itself
was listed in 1999, and the firm embarked on new Technopolis projects near Helsinki:Technopolis Helsinki Vantaa, adjacent to the capital’s Vantaa Airport, and Technopolis
Innopoli II in the Otaniemi district of Espoo. Noteworthy high-tech regions were on therise in Finland, and while there is no denying that Oulu came to be seen in relation tothese, its reputation as an international center of mobile technology was long-standing
and it continues to enjoy distinction as an ICT cluster.

133

In the foregoing I have examined the progress of a cluster’s five formative processes inthe sequence given in the working hypothesis. Rather than representing a strict orderin which one process begins at the conclusion of the one before it, this sequence
expresses a rough probability of progress backed by mutually enhancing causal
correlations. In this sense, this part of the working hypothesis – principally theproximate order of the five formative processes during the ‚foundation period‛ –appears to be sound.

4.4.2 Verification of Mutually Enhancing Causal Correlations among the Formative
Processes
Next I discuss the mutually enhancing causal correlations among the different
formative processes (Figure 3-5, p. 47), starting from the relationships originating in I,‚Improvement of the Environment for Innovation.‛①: ‚Places with good universities and public research and development institutions
are more attractive to high-tech firms.‛ The creation of the Department of ElectricalEngineers at the University of Oulu opened the way for joint research programs
between Dr. Matti Otala and Kajaani Electronics, and Seppo Leppävuori, then an acting
professor, and Aspo. These prompted a number of electronics firms to locate in the
Oulu region, and later encouraged other firms, clearly involved in causal correlations,
to move there as well. One such firm was the steelmaker Rautaruukki Corporation,
which set up an electronics division in Oulu.
②: ‚An environment supporting innovation promotes the growth of existing firms,
encouraging them to make the district their home base and facilitating the emergenceof anchor firms.‛ Upon moving to Oulu in 1973, Nokia launched joint research with the
University of Oulu and the VTT Electronics Research Laboratory, employing people
educated and trained at the university and Oulu Polytechnic (the Institute ofTechnology and other institutions) as it expanded the range and scale of its business.
This case demonstrates a fairly strong causal correlation between improvement of theenvironment for innovation in Oulu and Nokia’s development into an anchor firm.
③: ‚As the presence of universities and public research and development institutions
produces more innovative ‚seed‛ technologies and workers familiar with them,134opportunities for start-ups increase.‛ The strength of this correlation is proven by thefact the seed technologies of Oulu’s native high-tech firms were largely derived fromwork conducted at the University of Oulu or the VTT Electronics ResearchLaboratory 210 ; the founders of these local firms were often connected with the
University as well.211④: ‚Places with good universities and public research and development institutions
enjoy good reputations as research meccas.‛ The founding of the University of Oulu
and the VTT Electronics Research Laboratory helped to expand research in the field of
wireless telecommunications. In 1987, research on CDMA began in Oulu, involving
actors from both industry and academia. Events like these were instrumental to Oulu’s
budding reputation as a thriving center for research in wireless telecommunications
and related software. Another institution contributing to Oulu’s reputation as a
research mecca was the Center for Wireless Communication (CWC), a project-oriented
research facility founded in 1995 as an outgrowth of the Telecommunication
Laboratory of the University of Oulu’s Department of Electric Engineering. Oulu’s own
COE program holds forums promoting collaboration among actors from various fields.
Along with the Software Forum, the Mobile Forum was, in 1996, the earliest of these to
go into operation. The many accomplishments of the Mobile Forum included creating
the Octopus testing environment for mobile applications. While these achievements of
the latter 1990s took place against the backdrop of Oulu’s growing reputation as amecca for mobile technology research, I cannot say that the region’s ‚research mecca‛
reputation was their direct cause.
⑤: ‚As firms grow in number, they serve as leaders in facilitating innovation.‛ While
there was a clear increase in the number of ICT-related business establishments in Oulu
between 1995 and 2000 (Figure 4-20)212, the number of patent applications by inventors
residing in Oulu (Figure 4-21) – an indicator of innovation – showed no real growthover the figures for 1994, either in sum total or in the fields of electricity or physics.
Polar Electro is a typical example, but there are many others. Codenomicon Oy, a developerof robustness testing tools for software security, is among those firms which clearly originatedin the University of Oulu. The custom IC designer Fincitec Oy (purchased in 2002 by National
Semiconductor) is among those originating in the VTT Electronics Research Laboratory. One
firm which had its origins in both the University and VTT is Cybelius Software Oy, a CCC
subsidiary which develops simulation software for the field of virtual design.
211 Most of the Oulu-born high-tech firms mentioned in this paper – such as Elektrobit, CCC,
and NetHawk – were founded by graduates of the University of Oulu.
212 Because of statistical limitations, analyses were made for 1993 and the years thereafter.
210

135

Thus I was unable to confirm a correlation between these sets of circumstances.

Figure 4-21

Number of Patent Applications in the Oulu Region (Classified bybusiness field. Applications by inventors residing in Oulu.)

Number of apprications

250
Number of applications

200

150
Of which, in fields related tophysics (G) and electricity
(H)

100

50
Of which, in fields other thanphysics and electricity

2002

1998

1994

1990

1986

1982

1978

1974

1970

0

Year

(Data for Figure 4-21)
Year
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Number of applications
2 3 16 14 12 8 10 7 7 20 26 26 25 35 36 39 43 50
Of which, related to physics (G),0 0 1 2 3 2 4 0 2 2 3 5 7 10 7 12 17 16
electricity (H)Of which, in fields other than physics
2 3 15 12 9 6 6 7 5 18 23 21 18 25 29 27 26 34
and electricity
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Number of applications
60 77 111 130 134 166 209 171 170 221 160 169 212 186 169 151 160 152
Of which, related to physics (G),20 21 62 72 61 108 133 103 110 135 115 108 126 117 108 100 96 99
electricity (H)Of which, in fields other than physics
40 56 49 58 73 58 76 68 60 86 45 61 86 69 61 51 64 53
and electricity
Source: The Finnish Patent Office.

⑥: ‚As firms grow in number, the probability of anchor firms emerging increases aswell.‛ As a causal correlation, this presupposes a low probability that a firm enjoying
vigorous growth will emerge from among a large number of firms. In Oulu, Nokia andPolar Electro did not exactly emerge from a large number of high-tech companies tobecome anchor firms. Rather, it was the ‚improvement of the environment for
innovation‛ which played the key role in Nokia’s development into an anchor firm.
136This particular correlation, therefore, was not verified.
⑦: ‚As firms grow in number, the district’s industrial ecosystem deepens, increasing
the opportunities for new business creation.‛ Since numerical data on start-ups are
only available for the years since 1999 (Table 4-5), it is impossible to confirm a causal
correlation with the increase in the number of business establishments during the firsthalf of the 1990s. However, considering how markedly start-ups have increased since
2000, it would appear that opportunities for business creation did, to a certain extent,
result from the formation of the industrial cluster prior to that year.

Table 4-5

Numbers of Business Start-ups in Sectors Related to the Oulu ICT Cluster

Year
1999
2000
2001
2002
2003
Rubber and plastic product manufacturing
1
1
0
0
0
Metal product manufacturing
4
4
8
2
3
General machinery manufacturing
2
7
3
3
4
Electrical machinery manufacturing
6
5
3
8
8
Computer-related services
28
29
34
35
37
Business consulting
21
17
19
16
22
Total
62
63
67
64
74
Source: Statistics Finland
Note: “Business consulting” is given as an example of “other business (including corporate services)” in the “services” category.

2004
0
3
4
4
41
28
80

⑧: ‚As firms grow in number, the district enjoys a rising reputation as an industrial
agglomeration.‛ Although there was simultaneity between the growth in the numberof start-ups during the first half of the 1990s and the growth in Oulu’s international
reputation as an ICT cluster through the end of the decade, it was not possible toidentify circumstances which were clearly expressive of a causal correlation.
⑨: ‚Anchor firms link demand to technology, facilitating innovation.‛ In Oulu, thequestion is whether Nokia and Polar Electro furthered innovation in the Oulu regionby having become anchor firms. The number of a firm’s patent applications (Figure4-22) is an indicator of innovation output. Nokia’s patent applications began increasing
markedly after 1990, some years after it became an anchor firm in the latter 1980s.
Nokia’s applications served to push up the applications made by the region as a whole.
For this reason, I was able to can confirm that this correlation did exist in Oulu, mainlyin the 1990s. Applications made by companies other than Nokia and Polar Electrobegan increasing in the 1980s, and, it should be noted, they have shown firm growtheven since 2000, when applications by Nokia started gradually to decline.

137

Figure 4-22

Numbers of Patent Applications by Companies in the Oulu Region (Byapplicant. Inventors have addresses in the Oulu region.)

Number of applications

250
Number ofapplications

200
150

Of which, related to
Nokia

100

Of which, related to
Polar Electro

50
0Of which, unrelated to
Nokia or Polar Electro

Year(Data for Figure 4-22)
年
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Number of applications2
3 16 14 128 10
77 20 26 26 25 35 36 39 43 50
Of which, related to Nokia
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
2
2
Of which, related to Polar Electro 0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
Of which, unrelated to Nokia or
2
3 16 14 128 10
77 20 26 26 25 34 35 38 41 48
Polar Electro
年
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Number of applications
60 77 111 130 134 166 209 171 170 221 160 169 212 186 169 151 160 152
Of which, related to Nokia
4
8 47 42 40 63 92 69 63 99 79 72 61 57 53 35 26 36
Of which, related to Polar Electro 0
2
0
2
0
2
4
2
3
5
5
9 15
2
3
8
3
8
Of which, unrelated to Nokia or
56 67 64 86 94 101 113 100 104 117 76 88 136 127 113 108 131 108
Polar Electro
Source: The Finnish Patent Office.

⑩: ‚As anchor firms emerge, they produce increased business opportunities which
attract outside firms to the area.‛ One example here might be Scanfil Oy, amanufacturer of production systems for the electrical machinery industry which was
founded in 1976 and listed on the Helsinki Stock Exchange in 2000. In 1990, some years
after Nokia’s emergence as an anchor firm, Scanfil established a base in the Oulu region.
While that much is clear, limitations on the collection of data make it impossible toestablish a definite causal correlation.
⑪ : ‚As anchor firms emerge, business opportunities increase, providing more
opportunities for the creation of new subcontracting firms.‛ As has been mentioned anumber of times in this paper, Nokia’s emergence as an anchor firm has been shown to138

have had a clear causal correlation with the establishment of operating bases by
Elektrobit, JOT Automation, CCC, Solitra and other native Oulu firms.
⑫: ‚The reputation of a district benefits when it becomes known as the ‘home base’ ofan anchor firm.‛ With Nokia’s emergence as an anchor firm in Oulu and the company’s
rapid growth as a whole during the second half of the 1990s, Oulu built a reputation as
Nokia’s ‚home base‛ for base stations and embedded software development and as a
thriving ICT cluster as well. In 1992, Polar Electro won the President’s Prize forExporters. As a result of these events, Oulu gained renown as a city based on hightechnology. In this respect, I had no trouble in identifying a strong causal correlation.
⑬: ‚Improvement of the entrepreneurial environment results in more new firms, thus
facilitating radical and disruptive innovation.‛ Since data on start-ups in the Oulu
region are available only for 1999 and thereafter, I could not verify whether a causal
correlation existed during the cluster’s formative period. However, since much of theincrease in business establishments during the second half of the 1990s appears to havebeen due to start-ups, it appears that the number of new business openings has been
on a gradual ascent since that time. And, as we have seen in the foregoing, the numberof patent applications since 2000 by firms other than Nokia and Polar Electro213 isholding strong. Thus, there may be simultaneity in the timing of the two events, but
one cannot confirm a direct causal correlation.
⑭: ‚Improvement of the entrepreneurial environment leads to more new firms and a
deepening of the corporate agglomeration.‛ As logic, this is self-evident, provided thatbusiness closings do not exceed business openings. However, one is prevented from
confirming a direct correlation because of the lack of statistical data on the number ofhigh-tech business openings and closings in Oulu throughout the 1990s. It is clear thatthe number of ICT-related establishments increased in the decade’s second half, andthis increase did include firms moving into Oulu from other regions. Business
openings probably exceeded closings during this period, arguably by greater margin
than in former years.
⑮: ‚An improved entrepreneurial environment leads to more new firms, thereby
enhancing the district’s reputation as a home for rising industries.‛ The receipt of theI examine this here as an indicator not only of ‚radical and disruptive‛ innovation, but ofinnovation as a whole.
213

139

President’s Prize for Exporters in 1992 by Polar Electro, a native of Oulu, enhanced thereputation of Oulu itself. Later, Oulu’s reputation as a high-tech cluster was further
augmented by the listing on the Helsinki exchange of JOT Automation in 1998 and ofTechnopolis Oulu – the embodiment of the ICT cluster – in 1999. These events areindisputable and indicate the existence of a clear causal correlation.
⑯: ‚An established reputation facilitates the inflow of information on markets andtechnology, thus encouraging innovation.‛ Patent applications are an indicator ofinnovation output. Since the mid-1990s, when the region’s reputation was fairly
established (since the completion of the foundation period, in other words) the numberof patent applications has remained steady (Figure 4-22. While applications by Nokia
have declined from their peak in 1997, those by non-anchor firms have stayed firm
since the latter 1990s through 2000 and beyond.). Also, the Mobile Forum, Software
Forum and others operating under Oulu’s COE Program have been quite active since
1996, helped by the participation of companies from outside the region. Both events
may point to this causal correlation. In regard to the rise in applications, however, its
occurring simultaneously with the establishment of Oulu’s reputation is not proof of
causation. With respect to the latter event, I was not able to compare the situation withthat which preceded it, and therefore could not verify any clear causal correlation.
⑰: ‚Districts with an established reputation are more appealing to firms considering
location sites.‛ Since the mid-1990s, when the region’s reputation was fairly established(the completion of the foundation period), the number of start-ups has grown as awhole. However, I was unable to obtain data that would indicate how many of that
number came to Oulu from other regions. I was thus unable to establish a clear causal
correlation between the establishment of Oulu’s reputation and location in Oulu by
high-tech firms arriving from other regions.
⑱ : ‚Districts with an established reputation hold more interest for potential
supporting businesses.‛ This phenomenon is observed frequently among high-techindustrial clusters in the United States. Accountants, patent offices, and law offices
moved into Oulu relatively early, encouraged by incentives provided by Technology
Village Corporation and the city government.214 Most of the business angels active
Technopolis Accounting Office, for example, an accounting firm in business since the firsthalf of the 1980s, when Technology Village had its start, was established by a group of Oulu
natives; the patent office Kolster Oy and the law firm Roschier Holmberg Asianajotoimisto Oy,
214

140

there were Oulu natives, as shown in Table 4-4. Few facts exist to indicate a clear causal
correlation between the establishment of Oulu’s reputation and an influx of support
businesses from outside.215
The working hypothesis constructed in Chapter 3 for the formative mechanism of ahigh-tech cluster involved mutually enhancing causal correlations between the various
processes involved in the formative process. In Figure 4-23, the bold lines show whichof those correlations I could verify in Oulu. While I was unable to verify the remaining
correlations, neither could I deny their existence completely when all factors wereconsidered. I therefore chose to leave the working hypothesis as it was with nomodification.
As the figure shows, the correlations originating with I, ‚Improvement of theEnvironment for Innovation,‛ and III, ‚Emergence of Anchor Firms,‛ have evidently
had a stimulatory effect on the other formative processes in the development of Oulu’s
ICT cluster. Furthermore, processes III, ‚Emergence of Anchor Firms,‛ and IV,‚Improvement of the Entrepreneurial Environment,‛ are shown to have had a similarly
clear effect in stimulating process V, ‚Establishment of a Reputation,‛ which may be
regarded as an outcome of industrial cluster formation. ‚Improvement of theEnvironment for Innovation‛ and ‚Emergence of Anchor Firms‛ are, in themselves,
easily understood and have stimulatory effects on other formative processes that areeasily perceived. Yet both seem to occupy places of special importance in the hierarchyof formative processes.
In Oulu, activity groups played a big role in encouraging process I, ‚Improvement of
the Environment for Innovation,‛ which as a result has had a huge stimulatory effecton other formative processes (II, III and IV). We can say this because ‚as a result,‛ inthis case, means ‚as a result of stimulatory measures, helped by a certain amount ofluck.‛ Meanwhile, as the mechanism moved on to process V, ‚Establishment of a
Reputation‛ – an outcome of formative processes I through IV – activity groups wereunable to work directly on process III, ‚Emergence of Anchor Firms.‛ And, while
activity groups did promote the building of physical and institutional infrastructure,
leaders in their fields, set up bases in Oulu in the second half of the 1980s or beginning of the
1990s. (Interview with Seppo Mäki)
215 In the venture capital arena, funds flow into the region from other areas through networks
maintained by local venture capital firm TeknoVenture Management and virtual incubator
Oulutech.

141the greatest contribution to the entrepreneurial environment was process III itself, the‚Emergence of Anchor Firms.‛ It was therefore by no means easy to rely on activity
groups to promote formative processes III, IV and V. Efforts by activity groups topromote the formation of high-tech industrial clusters can be construed as actions
which strengthen the probability that the above processes will advance, while
encouraging those aspects which are most controllable (elements of processes I, II andIV) and hoping all the time for good luck.
Figure 4-23 The Mechanism of High-tech Industrial Cluster Formation: Five Formative
Processes, the Promotion of Causalities Among Them, and Causalities Verified in the
Oulu⑯(Improvements in infrastructure andinstitutions are feasible.)
I. Improvement of
the environment
for innovation
⑤
②
①

④
③

⑰
V. Establishment of
reputation⑧(Cannot be
controlled.)

⑭
⑬

⑨
⑦
⑫

⑱

⑮

II. Growth in the
agglomeration offirms(Infrastructure
improvement and⑥efforts to attract
firms are feasible but
cannot be directly⑩
controlled.)

IV. Improvement⑪
III. Emergence ofof theanchor firms
entrepreneurial(Cannot be controlled.)
environment(Improvements in infrastructure and institutions arefeasible.)

Note 1: Broad arrows show comparatively strong causalities; narrow dotted arrows
show comparatively weak causalities.
Note 2:① Places with good universities and public research and development institutions are more
attractive to high-tech firms.
② An environment supporting innovation promotes the growth of existing firms, encouraging

142

them to make the district their home base and facilitating the emergence of anchor firms.
③ As the presence of universities and public research and development institutions produces
more innovative “seed” technologies and workers familiar with them, opportunities for start-ups
increase.
④ Places with good universities and public research and development institutions enjoy good
reputations as research meccas.
⑤ As firms grow in number, they serve as leaders in facilitating innovation.
⑥ As firms grow in number, the probability of anchor firms emerging increases as well.
⑦ As firms grow in number, the district’s industrial ecosystem deepens, increasing theopportunities for new business creation.
⑧ As firms grow in number, the district enjoys a rising reputation as an industrial agglomeration.
⑨ Anchor firms link demand to technology, facilitating innovation.
⑩ As anchor firms emerge, they produce increased business opportunities which attract outsidefirms to the area.
⑪ As anchor firms emerge, business opportunities increase, providing more opportunities for thecreation of new subcontracting firms.
⑫ The reputation of a district benefits when it becomes known as the ”home base“ of an anchor
firm.
⑬ Improvement of the entrepreneurial environment results in more new firms, thus facilitating
radical and disruptive innovation.
⑭ Improvement of the entrepreneurial environment leads to more new firms and a deepening of
the corporate agglomeration.
⑮ An improved entrepreneurial environment leads to more new firms, thereby enhancing the
district’s reputation as a home for rising industries.
⑯ An established reputation facilitates the inflow of information on markets and technology, thus
encouraging innovation.
⑰ Districts with an established reputation are more appealing to firms considering location sites.
⑱ Districts with an established reputation hold more interest for potential supporting businesses.
Note 3: For processes IV→III (improvement of the entrepreneurial environment → emergence ofanchor firms) and V → III (establishment of reputation → emergence of anchor firms), directcausal correlations are difficult to conceive and therefore are not included in the above.

143

4.4.3 Verifying the Boundary between the Foundation Period and the Development
PeriodThe working hypothesis constructed in Chapter 3 presents the formative period as
consisting of a foundation period and a development period. I assumed the‚foundation period‛ to be that in which the five formative processes advance at areasonable rate, and the ‚development period‛ to be that in which all mutuallyenhancing causal correlations originating in each formative process begin to operate,
the high-tech cluster gathers momentum, and firm accumulation grows steadily greater.
If we take the founding of the University of Oulu, in 1958, as the ‚preparation stage‛ ofthe ICT cluster’s formation, we can regard the formative process of the high-techcluster (‚improvement of the environment for innovation‛) as having begun in 1965
with the creation of the university’s Department of Electrical Engineers. We canconsider ‚growth in the agglomeration of firms‛ as having started in the early 1970s,
when electronics firms began to put down roots in the region. The point at which we
see the ‚emergence of anchor firms‛ would be 1984, when Nokia began to aim at aworld market for its base station business, or 1985, when it started developing
embedded software for mobile phones. Also founded in 1985 were Elektrobit, built to alarge extent upon its business with Nokia, and CCC. ‚Improvement of theentrepreneurial environment‛ started in 1982 with the founding of Technology Village,
but the basic environment came together in the period between Nokia’s emergence asan anchor firm in the second half of the 1980s and the founding of Oulutech andTeknoVenture in 1994. Some controversy exists over when, after these four processes
had started, the region came to enjoy a certain reputation as an IT cluster. On the one
hand, we can assume that Oulu’s reputation was established around 2000, as it was
widely recognized by then and had produced a variety of outcomes including IPOs of
locally founded companies. On the other hand, we can assume its reputation to havebeen established in the mid-1990s, as suggested by its designation as a model region
under the government’s COE project (1994-present); we can interpret the increase in thenumber of ICT-related firms that occurred toward the end of the 1990s, and the successof the Mobile Forum operated as part of Oulu’s COE program, as having resulted fromoverall progress in the formative process. Viewed from the latter perspective, thefoundation period of the Oulu ICT cluster lasted from 1965 through 1994 and thedevelopment period from 1995 through 2000. The years since 2000 might appropriately
be viewed as the ‚period of maturity‛ that followed once formation had taken place, ora ‚period of change‛ ahead of a new era. The Oulu Growth Agreement, prepared in
2002 with guidance from the city government and the business community, posits new144

development strategies rather than a continuation of previous ones. Strategies are now
being rolled out which call for utilizing ICT, especially mobile technology, to provoke
innovation in other industrial sectors. Judging from the situations that existed before
and afterward, the late 1990s can be regarded as the ‚development period‛ envisaged
under the working hypothesis, whereas 2000 can be seen as the endpoint of theformative period as a whole. In the case of Oulu, the division of the formative period
into a foundation period and a development period can be explained with consistency,
and, therefore, verified in its essentials.

4.5. Principal Actors in Activity Groups Involved in the Formative Process of the
Oulu ICT Cluster
In the previous section I have attempted to verify the working hypothesis constructed
in Chapter 3. In regard to the ‚activity groups‛ included in this paper’s definition of anindustrial cluster, the working hypothesis presupposes, first, their existence, and,second, that they have made efforts of some sort to promote the formative process.
Looking at the Oulu cluster’s chronology to date, we see that activity groups haveexisted at each stage, pushing for the cluster’s formation, regardless of who played theleading roles in each group. In this section we shall see who these principal actors
were.
That companies themselves are the lead players in any industrial cluster is somethingthat hardly needs repeating. In Oulu, the first ‚activity group‛ can be said to have been
Professors Oksman and Okala, who in the late 1960s identified the possibilities of anelectronics industry in northern Finland, in the sense that they set forth a vision for thecluster and took concrete steps to realize that vision. The proclaimed intention at thattime was to develop the electronics industry in order to create jobs in northern Finland.
Central to this concept was increasing the number of factory workers earning relatively
low salaries. In other words, the aim was to use the research functions of the Universityof Oulu to draw in the productive functions of the electronics industry and cause themto stay. Entering the 1970s, the increasing number of instructors and researchers at theuniversity’s Department of Electrical Engineers helped attract the VTT Electronics
Research Laboratory to Oulu. Dr. Otala was named its director. Having pushedforward with commercialization research tailored to company needs, Dr. Otala could
be counted on to lead an institute with VTT’s history. Most graduates of the University145

of Oulu, moreover, went on build their applied research experience at the VTT institute.
In this sense, VTT, even as it contributed to Finland as a whole as a national center ofapplied research, was also a kind of ‚flying column‛ of the University of Oulu –particularly its Department of Electrical Engineering, which was then the central
activity group pushing for an ICT cluster in the region. Toward the end of the decade,through their ‚Sauna Event‛ and other initiatives, Drs. Oksman and Otala continued toadvance the philosophy that electronics engineers could, and should, contribute toregional development and job creation in northern Finland. The thriving success of
Nokia and Mobila in later years showed that young engineers shared this view.
Another key person was Seppo Säynäjäkangas, the first student of Drs. Oksman andOtala to graduate, earn a doctorate and become a professor. In 1977 he went on, as wehave seen, to found Polar Electro, a university-launched company which accurately
embodied their values. From the mid-1960s into the 1970s, it was Dr. Oksman, Dr.
Otala, and their colleagues at the University of Oulu and the VTT Electronics ResearchLaboratory, who, with their keen vision, drove the creation of the Oulu ICT cluster.
Earlier we have seen how, starting in the late 1970s, members of the Oulu city
government became beset with a sense of crisis. Paavo Simila was the first in
government to become aware of a problem, but in the 1970s he had not yet moved
people in the upper levels of City Hall, or in local politics, to take action. Socialist ideas
were still prevalent at the time, and general sentiment opposed active government
assistance to private companies.216 Movement by the city government and the city
council probably lagged to that extent. Great potential, but little change, was the orderof the day – but the situation was about to change, suddenly and dramatically, with aspeech by Antti Piippo, the outside entrepreneur who headed Aspo. The day after
Piippo’s speech in March 1980, Juha Linna (formerly Castrén), representative of the
Oulu branch of KERA and a confidant of the mayor of Oulu, and Veli-Markku
Korteniemi, Manager of Product Development and Marketing Units at the VTTElectronics Research Laboratory, submitted to the mayor of Oulu a proposal toestablish a committee on electronics. Mayor Ilmo Paananen, who had studied
conditions at Silicon Valley, lost no time in taking action. He invited the entrepreneur
Seppo Mäki to join the city government, and the latter charged ahead to raise
investment funds. In March 1982, the doors opened to Oulu Technology Village,
Scandinavia’s pioneering science park. Employees and know-how from the private
sector were skillfully used in operating what was positioned as the ‚business unit‛ of216

Interview with Paavo Simila.

146

the city government’s high-tech industries promotion policy. In June of 1984, the city
government made its ‚City of Technology‛ announcement, paving the way for a rapid
succession of industrial promotion policies.
As Nokia emerged as an anchor firm in the mid-1980s, the increasingly successful Polar
Electro was starting investment aactivities with Seppo Säynäjäkangas. At Nokia, Dr.
Veikkolainen, leader of the team developing embedded software for mobile telephones,
began working with other high-tech companies in the Oulu area. In 1984, Eero
Wallstrom, an alumnus of the Oulu Institute of Technology, became responsible for
Nokia’s base station division and took it into the global market; its subsequent run of
success drew enormous outside demand into the Oulu region. Wallstrom was a central
figure in the group of key people active in Oulu.217
If the 1990s were a decade of growing organized activity, as I discuss later, the 1980s
were characterized by individual networking. The volunteer groups mentioned earlier
included, besides corporate people, individuals who, although belonging toorganizations of all kinds, chose to participate on a personal, voluntary basis rather
than as part of some systematic strategy. It would be impossible to list all of thesemembers by name, but they comprised a burgeoning network of key persons not only
from companies, Technology Village, the city government, the University of Oulu, andthe VTT Electronics Research Laboratory, but also from Finnish government agencies,
financial institutions, business support firms and other entities. The casual observer
may hardly have been aware of these networks, but a sense of unity was developing
rapidly among their members – so much so that outsiders could be forgiven forthinking of them as an ‚Oulu mafia.‛ Most people seen this way were probably
members of one or another type of activity group.
The 1980s, then, were when activity groups began to include, in addition to people
working at the University of Oulu, a wide range of others comprising city government
officials, entrepreneurs who were the original force behind the industrial cluster(especially those involved with anchor companies), key individuals from variousorganizations, and their networks.

Jouko Möttönen, vice-president of Polar Electro at that time and a key member of the
Revontuliryhmä, or ‚Aurora Group,‛ mentioned earlier, referred to Eero Wallstrom as Nokia’s‚big boss‛ and the ‚soul of Oulu.‛
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Entering the 1990s, the business community became yet more energetic just as activity
groups themselves grew more organized. In Oulu’s business community at that time,
Nokia and Polar Electro, the pillars of activity groups for over a decade, werebeginning to share that role with the Oulu Chamber of Commerce and Industry andOulu-launched high-tech companies that had been gaining strength since Nokia’s
emergence as an anchor firm in the mid-1980s. The Chamber of Commerce andIndustry, Polar Electro, Elektrobit and CCC were among the key entities that took partin preparing an industrial strategy for the Oulu region in the first half of the 1990s.
Toward the end of the decade, local firms with assets amassed through public offerings
began to function as business angels as well. On the whole, the 1990s were a period
when a broader range of entrepreneurs, especially those who benefited from having
Nokia as an anchor firm, emerged as the central figures of activity groups, and when,
thanks to the work of the Chamber of Commerce and Industry, the business
community began to act more systematically than before.
Earlier in this paper I stated that 2000, when shipments by the Oulu ICT cluster peaked,
marked the point at which the cluster was essentially ‚formed.‛ What form, then, didactivity groups take during the period of maturity that followed 2000 (or the period ofchange that preceded a new age)? Since all important actors218 had already joined an
activity group by 1990, the examples that follow do not represent any new appearanceson the list of key figures; they do, however, point to a few instances of systematic
progress. There is, for example, the Oulu Regional Business Agency. Set up in 2000 by
the City of Oulu and the business support departments of ten neighboring local
governments, the agency offers free, individualized, expert support to entrepreneurs
and start-up firms, even in sectors other than ICT or high technology. Oulu Innovation
Oy, founded in 2205, coordinated the COE (Centers of Expertise) programs that were
hitherto overseen by Technopolis Corporation, managed the Oulu Growth Agreement
implemented principally by the city government, and worked on the Multipolis
Network, a group of cooperative projects involving regions or clusters in northern
Finland, each with its own unique characteristics. Thus, changes that took place in
activity groups after 2000 did not involve any increase in the range of participating
regional actors, as occurred from the 1970s through the 1990s. Change was limited tosystematic progress by regional actors and changes in the internal makeup oforganizations. It seems safe to say that up to 2000, growth in the number of activity
group supporters took place over a single continuous period that began in the late
218

The actors referred to here are organizations.

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1960s.

4.6 Summary
We have seen how the formative process of Oulu’s ICT cluster began with the openingof the University of Oulu in 1958 and the founding of its Department of ElectricalEngineers in 1965, followed by the gradual establishment of electronics firms in theregion in the early 1970s and the successful overture made to the VTT Electronics
Research Laboratory in 1974. These regional actors became the key components ofTechnology Village, northern Finland’s first science park, established in 1982 under theleadership of the Oulu city government. The move by Technology Village to a site next
to the university in 1985, followed by a move to the same location by the VTTElectronics Research Laboratory in 1989, brought the major actors together in
Linnanmaa, thus further improving the environment for innovation and drawing in
greater numbers of ICT firms. Into this nurturing environment came Nokia, whichstarted in the mid-1980s to gradually expand its business in Oulu. Nokia’s emergenceas the region’s anchor firm brought a wealth of business opportunities, and much real
growth, to such Oulu-launched high-tech companies as Elektrobit, JOT Automation,
CCC, and Solitra. Not only did the presence of an anchor firm enrich the region’s
industrial ecology, but dedicated efforts by activity groups – such as the establishment
in 1994 of the regional venture fund TeknoVenture and the virtual incubator Oulutec –further enhanced the environment for entrepreneurs. Around the same time, Oulu wasnamed a model region under the Ministry of the Interior’s COE program, improving its
reputation still more. This continuing progress in the formative process, and theongoing growth of Nokia as the region’s anchor firm, backed further growth in thenumber of ICT-related places of business as the 1990s wound down. At the decade’s
end a number of Oulu-launched firms went public, including JOT Automation and thecompany that exemplified the Oulu ICT cluster, Technopolis Oulu. Each of these events
helped to solidify Oulu’s reputation as a high-tech industrial cluster. Thus I haveverified the rough order followed by the five formative processes of the working
hypothesis.
The following mutually enhancing causal correlations have also been verified: ①
Places with good universities and public research and development institutions are
more attractive to high-firms; ② An environment supporting innovation promotes the149growth of existing firms, encouraging them to make the district their home base andfacilitating the emergence of anchor firms; ③ As the presence of universities andpublic research and development institutions produces more innovative ‚seed‛technologies and workers familiar with them, opportunities for start-ups increase; ⑨
Anchor firms link demand to technology, facilitating innovation; ⑪ As anchor firms
emerge, business opportunities increase, providing more opportunities for the creationof new subcontracting firms; ⑫ The reputation of a district benefits when it becomes
known as the ‚home base‛ of an anchor firm; and ⑮ An improved entrepreneurial
environment leads to more new firms, thereby enhancing the district’s reputation as ahome for rising industries. The other causal correlations were not proved to be absent,
but neither could they be verified in the case of Oulu. That task must be addressed at alater date.
We have seen that the founding of the University of Oulu served as the preparation
stage for the Oulu ICT cluster’s formative period, and that the formative processes
began in earnest with the ‚improvement in the environment for innovation‛ that camewith the university’s establishment of the Department of Electrical Engineers in 1965.
The ‚progress of firm accumulation‛ began early in the 1970s, when electronics firms
started putting down roots, and the ‚emergence of anchor firms‛ came in the
mid-1980s as Nokia’s base station business gained momentum and the firm began
developing embedded software for mobile telephones. I placed the start of the‚improvement of the entrepreneurial environment‛ in 1982 with the opening ofTechnology Village, although it took until 1994 for the major components of such anenvironment to be in place, with Nokia having emerged as an anchor company andOulutech and TeknoVenture open for business. The question of when the region
attained a reputation as an ICT cluster is a difficult one, but I was able to place it ataround 1994, when the Finnish Ministry of the Interior’s COE program took off with
Oulu as its model region. I considered the years up to this point as the ‚foundation
period‛ and the second half of the 1990s, when the number of ICT-related firms was on
the rise, as the ‚development period‛ with all the expansion of scale that that implies. I
put the region’s establishment of a solid reputation at the end of the decade, whengrowing numbers of its firms were going public. I drew a line under the development
period in 2000, when the peak in shipments and other indicators showed that the Oulu
ICT cluster was essentially formed. I therefore placed the years from 1965 through 1994
as the foundation period, those from 1995 through 2000 as the development period,
and those since 2000 as a period of maturity or change ahead of a new era.
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As for the principal figures in the activity groups working for an ICT cluster in Oulu,
from the late 1960s through the 1970s these were Dr. Oksman, Dr. Otala and theircolleagues at the University of Oulu, as well as the staff of the VTT Electronics
Research Laboratory. All of these had a vision which propelled the cluster forward. In
the 1980s they were joined by individuals in the Oulu city government and theentrepreneurs – particularly managers of anchor firms – who had originallypropounded the idea of an industrial cluster. The 1990s were characterized overall by
more organized efforts on the part of the business community. Activities were now
undertaken by a broader group of people than in the past, including especially thoseentrepreneurs whose companies were growing stronger thanks to Nokia’s and othercompanies’ emergence as anchor firms. The decade also witnessed the inclusion ofchambers of commerce and industry among the major activity groups. The 1970s
through the 1990s saw continual expansion of the membership of activity groups, butchanges since 2000 have been limited to progress in the organization shown by local
actors and turnover among the groups’ members.

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Chapter 5

Conclusions

In the preceding sections I have used the chronology of the Oulu ICT cluster’s
formation to examine the working hypothesis 219 on the formative mechanism ofhigh-tech industrial clusters constructed in Chapter 3. My findings have substantiallyverified that the five formative processes began to function in the following roughorder, primarily during the foundation period: I. Improvement of the environment for
innovation; II. Growth in the agglomeration of firms; III. Emergence of anchor firms; IV.
Improvement of the entrepreneurial environment; and V. Establishment of a
reputation.
I have also substantially verified the following mutually enhancing causal correlations:①Places with good universities and public research and development institutions are
more attractive to high-firms; ② An environment supporting innovation promotes thegrowth of existing firms, encouraging them to make the district their home base andfacilitating the emergence of anchor firms; ③ As the presence of universities andpublic research and development institutions produces more innovative ‚seed‛technologies and workers familiar with them, opportunities for start-ups increase; ⑨
Anchor firms link demand to technology, facilitating innovation; ⑪ As anchor firms
emerge, business opportunities increase, providing more opportunities for the creationof new subcontracting firms; ⑫ The reputation of a district benefits when it becomes
known as the ‚home base‛ of an anchor firm; and ⑮ An improved entrepreneurial
environment leads to more new firms, thereby enhancing the district’s reputation as ahome for rising industries.
I was not able to verify the other causal correlations and will address that task at a laterdate.
I have divided the formative period as a whole into a foundation period and a
In this paper I use the term ‚working hypothesis‛ as defined in the Kojien: ‚A hypothesis,
established not with the objective of providing an ultimate explanation for a given phenomenon,
but as an effective means of controlling or facilitating research or experimentation currently
under way.‛ I do not attempt to offer a uniform theory for the formative mechanism ofhigh-tech industrial clusters. Instead, I assume a case in which a high-tech cluster is formed in aregion without an existing industrial agglomeration. To construct a formative mechanism, I callthis a ‚working hypothesis for the formative mechanism for a high-tech industrial cluster.‛
219

152

development period. I assumed that progress takes place in the foundation period in
the rough order outlined in I to V above, and that the formation of the cluster gains
momentum due to mutually enhancing causal correlations occurring in thedevelopment period. These assumptions, too, have been confirmed and substantiallyverified by an examination of the developmental chronology in Oulu. Thus I was able
to conclude that 1965 through 1994 was the Oulu ICT cluster’s foundation period, 1995
through 2000 its development period, and the years since 2000 a period of maturity that
followed its formation (or a period of change leading to a new era).

We have seen that the ‚activity groups‛ referred to in this paper’s definition ofindustrial clusters have existed at each stage of the cluster’s formation, working toaccelerate the formative process; that the principal figures in these groups have been
joined in each period by new regional actors; and that with the passage of time, thenature of their activities has changed from efforts dependent on personal networks tothose of a more organized form involving broad participation from the business
community.
In this paper I have attempted to deduce a working hypothesis for the formative
mechanism of a high-tech industrial cluster and verify that hypothesis by examining
the formative chronology of the ICT cluster in Oulu, bearing in mind cases in which
high-tech industrial clusters have formed in regions having no existing industrial
agglomerations which could serve as the nucleus of such a cluster. As a result, I havebeen able to verify the rough progression of five formative processes during thefoundation period and a number of mutually enhancing causal correlations among theformative processes, as well as the effectiveness of dividing the formative period as awhole into a foundation period and a development period. These findings, it goes
without saying, are provisional, the working hypothesis supposing that the high-techcluster will develop in a region having no existing agglomeration of industry. Also,
there were a number of mutually enhancing causal correlations among the fiveformative processes which I was not able to verify for this paper. I am confident,
however, that, by offering a dynamic reading of the subject, this paper will contributeto the research on the formative mechanisms of high-tech industrial clusters.
In the future I would like to test the above-mentioned working hypothesis in otherregions and examine the formative mechanisms in areas where high-tech industrial
clusters have developed out of existing agglomerations of industries. In doing so I
153

would consider the questions left unresolved by this study, particularly as they concern
the mutually enhancing causal correlations among the formative processes.

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Appendix

Implications of IT Cluster Formation for Regions in Japan

Here I should like to consider the conclusions drawn in this paper in terms of theirimplications for regions in Japan that aspire to create their own IT clusters. Ideally, thiswould be done after focusing on a specific region and gaining a thoroughunderstanding of its circumstances. Since it was not possible to expand the range ofthis research to include analyses of particular Japanese regions, I shall examine thegeneral implications for Japanese regions featuring initial conditions similar to those of
the regions shown in the upper left of Figure 3-6 (those without an industrial
agglomeration capable of forming a base for IT industry).220 While a certain degree ofabstraction is inevitable when an examination lacks a specific focus region, some points
of importance do emerge and I shall consider these in reference to the five formative
processes discussed in this paper.221① Existence of some degree of urban infrastructure
Before embarking on a discussion that relates to the formative processes, I should
touch upon one initial condition, the ‚existence of some degree of urban infrastructure.‛
Oulu has long been one of northern Finland’s central cities, and as such it fulfills theinitial condition of having a certain degree of urban infrastructure. The IT clusters

This paper does not specifically analyze the cases shown in the upper right quadrant of
Figure 3-6 (cases in which high-tech industrial clusters have formed in regions with existing
agglomerations of machinery or other industries). In such regions, we can assume that existing
agglomerations of machinery or other industries, present as initial conditions, serve as
groundwork for the second of the formative processes discussed in this paper, ‚progress in theaccumulation of companies.‛ Needless to say, these groups of companies do not qualify, in their
original form, as high-tech industrial clusters; to do so they must transform themselves into aform definable as ‚high-tech.‛ Formative process I, ‚improvement of the environment for
innovation,‛ is envisioned as the necessary process these groups of firms must undergo to
emerge more sophisticated and ‚high-tech.‛ Thus, even in regions like these, we can conclude
that there is little to object to in the logic behind the rough order of the five formative processes(the mutually enhancing causal correlations among the formative processes). At the same time,such regions not only have existing agglomerations of companies, but existing companies thatexhibit features of anchor firms, suggesting that an environment favoring entrepreneurshipalready exists to a certain extent. If that is the case, the probability of the entire formative
process moving ahead may be greater for such regions than for those listed in the figure’s upper
left quadrant; the probability of the five formative processes of the foundation period
progressing roughly in order from I to V may be relatively lower.
221 In the following I cite Oulu as an example; it should be remembered, however, that this isdone only to illustrate this paper’s themes in an easily understandable way.
220

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listed in Figure 3-6 may differ widely in terms of their existing industrial
agglomeration, but each of them had some degree of urban infrastructure as an initialcondition, either within the city itself or in a neighboring area. It would be difficult tosay just how much urban infrastructure is required as an initial condition. In order toattract and retain engineers, scientific researchers and home bases of high-techcompanies, a region must have the fundamental requirements for daily life andeconomic activity – a certain accumulation of commercial and service businesses, aswell as medical, educational, and transportation infrastructure222 – available either athome or in a neighboring area. Over the long term, moreover, a community’ssurrounding natural environment and local culture, as well as its more functional
aspects, may become important gauges of its attractiveness as a place to live.223 It is notdifficult to imagine how such urban functions or ease of living might obstruct, or
promote, each formative process of a high-tech industrial cluster.
② Target sectors of high-tech industrial clusters
Among the five formative processes of high-tech industrial clusters, ‚improvement of
the environment for innovation‛ is a possibility at a relatively early stage. The question

The functions provided by an airport are considered vitally important to the formation of ahigh-tech industrial cluster. While a nearby airport with frequent international flights is not
absolutely necessary, access to major foreign cities via a domestic hub facility – if possible, one
within the economic sphere of the capital or another large city – is undoubtedly important. In
Japan, the opening of Chubu International Airport in 2005 improved connections withinternational flights. For example, as of August 2006, there were three flights per day between
Shin-Chitose and Narita airports, but fifteen between Shin-Chitose and Chubu International,
and two between Sendai and Narita but six between Sendai and Chubu International. As longas business and public functions remain concentrated in the Tokyo metropolitan area, people
from outlying prefectures will continue to suffer the drawbacks of having poor access tointernational flights via Tokyo-area airports. As regions outside the metropolis expand theirexchanges with regions overseas, there will not only be greater traffic not only between theregions concerned, but there will also be the necessity to utilize the functions of both countries’
capital areas, such as accumulations of diverse businesses, diplomatic missions, and the central
government and its agencies.
223 Among students of industrial clusters, not a few stress ‚quality of the living environment‛
as an important factor in the formation and continuation of a high-tech industrial cluster.
According to David Gibson, a member of the IC2 Research Center at the University of Texas atAustin who has carried out a lengthy, ongoing study of that city, the quality of life of a region –whether it is good enough to draw in talented, educated people – is the bottom line in deciding
the success of a high-tech region (Interview with Gibson on December 5, 2006). This has muchin common with the ‚creative class‛ theory put forward by Florida (2002), which argues thatpeople in the creative professions, such as musicians, artists, scientists, teachers, and others,
tend to be sensitive about their living environment.
222

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of which kinds of ‚innovation‛ are needed seems to depend on the specialty of theintended high-tech cluster. In Oulu’s case, the University of Oulu was from a very earlystage a nucleus for research and education in electronics, wireless communications andthe software these fields required. It performed this role because of the judgment of
those at the university that such fields would contribute to the development of theuniversity’s engineering program and to job creation and industrial development inOulu and northern Finland in general. They arrived at this assessment not only
because they felt the electronics industry promised great future development – asentiment shared throughout the world at the time – but because in Finland, it was
only around Helsinki, with its University of Technology, that research and businessagglomeration were taking place in the field of electronics. If Oulu were to launch into
the field at that time, it might be able to display the outstanding features whichcharacterized it as a region.
If Japanese regions are to progress in creating high-tech clusters under current
conditions, one idea might be to select reasonably specific fields from the very wide
range of high-tech areas which are considered promising – such as information andcommunications,lifesciences,

nanotechnology

andnanomaterials,

and

the

environment, the four fields given priority designation under the government’s Basic
Plan for Science and Technology – and prepare the conditions needed for innovation in
those fields. The central issue is how a region can secure competitive advantage overother regions, and whether doing so will lead to job creation and sustained
development for local industry (Oulu had only a small accumulation ofmachinery-related companies, but electronics research was launched at an early stage
and the region had the potential to become second only to Helsinki in importance).
How a cluster will bond with existing local industries224 is another issue to consider.
Knowledge, along with insight, is needed to examine the current status and future
prospects of industries and scientific technologies; an accurate grasp of local industry
and technology is essential. In any event, this kind of judgment, which we may defineas ‚vision,‛ almost inevitably involves much that is hard to pin down. Acquiring such
vision is not easy, and setting it forth with responsibility is more difficult still. In Oulu,
Dr. Oksman, the father of the university’s Department of Electrical Engineers and for atime its director, and Dr. Otala, who was scouted by Dr. Oksman, saw their mission
and took it on of their own accord. Their first concrete actions were to change thePossibilities for using the technologies of a high-tech field in an existing local industry;
potential for integration with the cluster; etc.
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Department of Electrical Engineers from a training place for electrical engineers (itspurpose at its inception) to a venue for electronics research, and, especially in the caseof Dr. Otala, to spell out for the mass media their vision of promoting the electric andelectronics industries in northern Finland (he envisioned thousands of new jobs in thenext few years).225 In regional Japan, either then or starting in the mid-1990s, thecentral government provided backing in the form of industrial cluster promotion
policies, while local populations themselves grew more keenly aware of the social andeconomic sustainability issues in their communities. Compared to earlier times, it was
now somewhat easier to adopt cluster strategies that were likely to involve uncertain
factors such as these. Localities were in fact encouraged to do so, in part by focusing on
particular fields of industry or technology. However, except where it involves thecontinuing development of a region’s existing industries or technologies, the task of
selection is inherently quite demanding, and policymakers need to keep this in mind.
To put it another way, if there is a high-tech field in which a region’s existing industries
or technologies can serve as the basis for development, that field will probably be a
promising target for that region. With any such vision, moreover, there comes a good
possibility that new fields will branch off from the one originally envisaged, and thatthese new fields will achieve high growth having been altered by the incorporation of
new technological directions.226 In the early stages of a cluster’s formation, a vision
should be broad enough to include the possibility of this kind of development.
③ Networks supporting activity groups
Some of the five formative processes, particularly III, ‚emergence of anchor firms,‛ andV, ‚establishment of a reputation,‛ offer little room for direct effort by activity groups.
Process I, ‚improvement of the environment for innovation,‛ has relatively numerous
areas in which activity groups can function. While the specific nature of their efforts
will be discussed later, they could include such challenging schemes as attracting
projects involving government-affiliated agencies or research organizations. First, weshould acknowledge that for such efforts to come about, it is necessary to obtain the

In an interview, Dr. Oksman said ‚In 1975, (several years after Dr. Oksman and Dr. Otala set
forth their vision,) employment in EEI (the electrical and electronics industries) reached 2,000
jobs; somehow, we were able to save face.‛ (Additions in parentheses are the author’s.) Bothtaking responsibility for their statement, they worked hard to advance collaboration between
industry and academia; by spelling out their vision, they assumed no small amount of risk andresponsibility.
226 As wireless communications, for example was one field from the very broad sphere ofelectricity/electronics which took off and flourished.
225

158

understanding of influential people who can ‚improve the environment for innovation‛– such as university presidents or deans, heads of local authorities, or leaders of
economic organizations – and involve them in such activities; alternatively, they can bemembers of activity groups themselves. Most people see such activities as exceeding
their professional responsibilities and not entirely necessary. Such tasks may often
entail a certain amount of risk, and one needs a strong sense of purpose to take themon for the good of one’s community. This can probably be said of all efforts by activity
groups. While there are people who are happy to do this kind of work without outsideencouragement, sustained, coordinated efforts are likely to depend on the existence ofgroups of people with shared beliefs and a desire to exchange ideas. In a cluster ’s early,
formative stages, this is most likely to start with local networks of individuals who
cooperate with and support each other on the strength of shared views and a common
vision.227 Oulu’s ICT cluster traces its formative process to the vision of a group of
university researchers in the latter half of the 1960s. However, the unofficial networks
led by these researchers were Oulu’s first real activity group. In the late 1970s, they
were joined by another unofficial network, known as the Aurora Group 228, whose
members were primarily business people. Later this network became a corporation, in
which form it continues to operate today. Its members include people working not onlyin high-tech industry, but also in academia and at the VTT Electronics ResearchLaboratory, supporting businesses of all kinds, the Oulu city government, government
agencies and various other organizations. We can easily imagine that the ideas andfriendship that link these people also serve as a source of energy for everyone involved.
At the same time, it pays to remember that these groups developed out of theparticular circumstances obtaining in Oulu. Activity groups, and their supporting
networks, will operate in ways that reflect the characteristics of their region.
④ Improvement of the environment for innovation
I shall now consider how activity groups serve to improve the environment for
innovation. Earlier, I mentioned that in Oulu, processes I, ‚improvement of theenvironment for innovation,‛ and III, ‚emergence of anchor firms,‛ promoted the
It is important, of course, that such activities be confirmed at some stage by officialorganizations or networks or taken up by a range of regional actors. In this paper I use ‚activity
groups‛ to mean adaptable, flexible activity groups, whether official or non-official, that are
devoted to the causes described.
228 Called ‚Revontuliryhmä‛ in the original Finnish, this group has performed an importantrole as a personal network supporting the Oulu cluster’s activity groups. Outside the region,
however, its work has been less conspicuous.
227

159

progress of other formative processes in multiple, easily verifiable ways. That theseformative processes play especially important roles in the creation of high-tech clusters
is, in all probability, a universal phenomenon. Process I, ‚improvement of theenvironment for innovation,‛ would seem to be the most important process of all, as itis the one which allows the greatest room for activity groups to operate.
Activity groups promote this formative process directly by strengthening fields
associated with knowledge creation and the fostering of human resources (at institutesof higher learning and public research facilities) and building both physical andinstitutional infrastructure. In the former case, they might improve the organizationalframework or academic curricula of higher-learning institutions so that innovation canproceed smoothly in the region’s targeted fields. They could lend organizational
expertise to a public research facility by obtaining research funding or allocating suchfunds among different departments, or by assisting in the creation of partnerships
between the facility and private companies or other enterprises. In some cases, theregion itself might work to attract new public research organizations or government
projects. Translating these objectives into reality is by no means easy, but persistentefforts have often paid off, and when this happens the potential for long-ranging
results can be enormous.
For an example of the latter case – the building of physical and institutional
infrastructure – we can look at how activity groups played a role in the creation of the
Science Park located next to the University of Oulu. Oulu’s fortunes have been greatly
served by its having a public research institution, the VTT Electronics ResearchLaboratory, and Technology Village, Scandinavia’s first science park, operating adjacentto the university. However one looks at this convergence – as a venue for promoting
innovation, a site for corporate agglomeration, or a means of establishing a reputation
beyond the region – its positive effects have been huge. Technology Village, a true
manifestation of the city’s industrial policy, began as a third-sector project with land
supplied free of charge by the city. We must remember, however, that while the Science
Park has been important in the physical sense (as ‚hard‛ infrastructure), the region’scomprehensive industrial policy package has probably been more important, as ‚soft,‛
institutional infrastructure providing comprehensive backing for the Science Park andits tenant firms’ activities. Oulu’s people have exercised their ingenuity in innumerable
areas toward this end, including the selection of people to work in such fields. In morethan ten years of doing so, they seem to have been less interested in serving as an
160

model for other regions than in removing obstacles to the achievement of fundamental,
idea-based goals (in Oulu’s case, promoting the creation, establishment and growth ofhigh-tech companies) in keeping with the actual circumstances of individualcompanies and regions.
⑤ Growth in the agglomeration of firms
This process, the second on our list, offers relatively few opportunities for direct
engagement by activity groups. Some efforts have borne fruit, however, such as thecreation of the science park, industrial estates, and other locations for companies
attracted to the area. With an eye toward corporate inducement measures included in aregion’s industrial cluster policy and deficiencies in its industrial ecology – a lack ofsupporting businesses, for example – activity groups are an important means of fillingin the gaps.
This is one area where process I, ‚improvement of the environment for innovation,‛
can have substantial promotional effects. Partnerships between local research facilities
and academic institutions, for instance, can draw in new firms from outside the region
or facilitate new business inroads by major local firms. In fact, strenuous efforts byprofessors with the University of Oulu’s Department of Electrical Engineers (now the
Department of Electrical Engineering) were a factor in the decision by Kajaani, an
Oulu-based paper and pulp company, to enter the electronics market at the end of the
1960s. Early in the 1970s, Aspo, a leading firm from outside the region, followed byestablishing an electronics subsidiary, Paramic, in Oulu. These and similar moves were
instrumental in promoting the accumulation of firms in the area.
⑥ Emergence of anchor firms
Like process I, ‚improvement of the environment for innovation,‛ process III, the‚emergence of anchor firms,‛ proved important in promoting the other formative
processes. On the other hand, however, activity groups are unable to have much direct
impact on this particular formative process. When a company has moved into a region
from outside, becoming an anchor firm requires that its local division achieve
substantial growth within the region, so that it functions as the home base for thedivision concerned. If the company is locally-based, it must itself achieve substantial
growth. Here, as in other processes, process I, ‚improvement of the environment for
innovation,‛ can have important promoting effects. Whether the firm is a businessdivision of an outside company or a home-grown enterprise, innovation is naturally a161key factor in achieving healthy growth. Thus, it is especially significant when a region
creates an environment that favors innovation by companies like these, and when local
research and educational institutions pursue active partnerships with local companies.
Regions in Japan generally are keen to attract creative industry, with local government
taking the lead. However, only a very few regions seem prepared to provide suchbusinesses, once they have arrived, with backup, in the form of continuing
communication with a variety of local actors, that will promote the innovation sonecessary to growth. But if a region hopes to gain an anchor firm, it needs to promotethat goal on a region-wide scale, involving not only the group that attracted the firm in,but other local actors such as higher-learning institutions and public research facilities.
Activity groups in Oulu include diverse local actors, particularly individuals belonging
to the university and the VTT Electronics Research Laboratory. The dedication they
displayed, coupled with introductions made possible by their networks, led topartnerships which helped turn Nokia and other companies into anchor firms andfurther supported their business expansion.
⑦ Improvement of the entrepreneurial environment
Process IV, ‚improvement of the entrepreneurial environment,‛ is a key formative
process which, along with process III, ‚emergence of anchor firms,‛ strongly supports
the fifth and final process, ‚establishment of a reputation.‛ Naturally enough, theincrease in new business creation that occurs as this process moves forward promotes
the progress of process II, ‚growth in the agglomeration of firms.‛ As noted repeatedly
in this paper, one of the most effective factors in promoting ‚improvement of theentrepreneurial environment‛ is an enhancement of the industrial ecology through the‚emergence of anchor firms.‛ Also effective is the creation of the kind of infrastructure,both physical and institutional, that will encourage entrepreneurship. In Oulu, thistook the form of the Technology Village incubator (opened in 1987), the regional
venture fund TeknoVenture (set up in 1994), the virtual incubator Oulutech (founded
in 1994) and other similar organizations. Enterprise Forum, an entrepreneurial seminarfor students led since 1986 by a liaison officer at the University of Oulu, isrepresentative of the ‚soft‛ infrastructure built up over the years. Today, backed by the
Ministry of Economy, Trade and Industry, regions throughout Japan are ‚improving
the entrepreneurial environment‛ by establishing incubators, venture funds, and otherforms of physical and institutional infrastructure. Japan has made significant progressin this respect. While this in itself is a desirable achievement, to create a high-techindustrial there would seem to be other important processes that should be promoted
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first; Oulu, after all, completed its infrastructure-building in 1994.
⑧ Establishment of a reputation
Process V, ‚establishment of a reputation,‛ is to a great extent an outcome of each of
the processes I through IV; one would do well to assume that activity groups played aminimal part in promoting it. It is interesting, however, to consider that thecatchphrase ‚City of Technology,‛ a key part of the strategy for encouraging corporate
agglomeration in Oulu, not only proved effective in promoting that goal, but alsofunctioned as a bridge to the later ‚establishment of a reputation.‛229⑨ Formative and strategic periods of a high-tech industrial cluster
Having described how high-tech clusters develop in line with the five formative
processes, one other matter we might wish to consider is the formative period of ahigh-tech cluster. It is commonly pointed out that a high-tech cluster needs a long time
to develop – something on the order of thirty to forty years – and requires consistenteffort on the part of activity groups. To aim for quick results is to invite disappointment
and resignation. The drafting of regional industrial promotion strategies, principally by
local governments, can serve an important function in terms of an activity group effort;such strategies or policies appear to be more effective, however, if they are
implemented on a mid-to-long-term, rather than a yearly, basis. While it is important toconfirm progress each year, with the total formative process taking so long, a minimumof two to three years are needed for another formative process to move forward
appropriately. In this sense as well, it is important that strategies be generated andimplemented within a time-scale of several-year increments.
⑩ Region-led efforts and the need for think tank capabilities
The second point I should like to add is perhaps self-evident: that it is regions
themselves that should take the lead in the creation of high-tech clusters. In Japan,
policies set in motion by the Ministry of Economy, Trade and Industry and the Ministryof Education, Culture, Sports, Science & Technology have prompted regional
governments to roll out their own policies and strategies on industrial clusters. In the
future as well, the national government will play an enormous role, not only byencouraging the unique initiatives of individual regions in a general way, but by
One person who handled Oulu’s external relations for many years, and in that sense made ahuge contribution to the ‚establishment of a reputation,‛ was Seppo Mäki, who was business
relations manager in the Oulu city government from 1981 through 2000.
229

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providing bold support through government-affiliated organizations and the allocationof government projects. Regions, of course, should make the most of central
government support. But since an industrial cluster is, in its very nature, a regional
strategy, it is the region itself that should set and carry out the policies and strategies
needed for their formation. To do this, a region must call on all of the intellectual
resources of the members of its activity groups. But in addition, it must itself be able togather and analyze required information, and to draft strategy, in ways that matchchanging local needs and the objectives of activity groups. In the latter half of the 1970s,
the office of the president of the university filled this role in Oulu; since the 1980s it has
been the Bureau of Economic Affairs and other sections of the city government230, andat one period (albeit in part) it was the university’s Department of Economics. In Japan,
this function might be filled by public think tanks with deep local roots, the economics
or business departments of local universities, or regional organizations such as joint
research centers. Also important will be ‚think and do tanks‛ in the form of theindustrial promotion departments of local governments and local economic
associations. People can contribute a great deal by performing the functions of a thinktank for activity groups, looking consistently into the issues surrounding high-techclusters and developing proposals for their development; this would also be helpful inpromoting effective, continuing work by the activity groups themselves.

From the 1980s through the 1990s, it was Paavo Simila, of the city government, who actuallyorganized and wrote papers on industrial strategy in Oulu. A graduate of the university’s
Department of Economics, he joined the Oulu city government in 1972. Between that year and1999, when he left to take up the presidency of Oulu Polytechnic’s business school, he carriedout a series of studies, projects, and industrial policy works. A calm, composed strategist, Paavo
Simila, along with Seppo Mäki, was one of the major figures from the city government in Oulu’s
activity groups.
230

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Afterword

Industrial clusters, and high-tech clusters in particular, are sure to remain an importantregional and national issue for Japan. In this paper I have consistently emphasized thatthe principal actors in any cluster, whether high-tech or not, are companies, especiallythose which are locally based. But vital as well are the regional actors – universities andother higher learning institutions, public research facilities, economic associations, local
governments, local branches of the central government, and financial institutions andother supporting businesses – that work with these companies to improve local
initiatives and functions. In planning for sustainable development, most regions inJapan give serious thought to high-tech cluster strategies. Even while home to
top-notch universities, a number of regions have lost graduates to other parts of thecountry because of a lack of high-tech headquarters. These regions are now working
hard to build high-tech clusters. Sometimes a region will develop something
resembling an industrial cluster without having made any particular effort toward that
end. While there is nothing wrong with this, only a few such regions exist in the world– probably few enough to count on one hand. And here we have the reason why somany ‚activity groups‛ have sprung up to promote the building of clusters.
When I defined industrial clusters for this paper, I included the existence of activity
groups because I wished to discuss the formative mechanisms of high-tech clusters forregions that would benefit from them. I embarked on this paper in the hope that thediscussions it contained would provide some hints for regional residents concernedwith this issue. As to how meaningful these arguments will prove for regions in Japan,
I await your criticisms and corrections.
Many people in Oulu were of immense help to me in my research. I thank not only
those who sat for interviews, but also those who provided important statistical data.
Seppo Mäki, former director of business relations for the Oulu city government, isdeserving of special acknowledgment. Although he resigned from the city government
in 2000, Mr. Mäki continues to be active in a number of positions. A kind andenthusiastic man whose contribution to the city government is difficult to overstate, Mr.
Mäki helped me in ways too numerous to mention. I take this opportunity to offer him
my deepest thanks.

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