January 23, 2018

Nokia and the Multiplier

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In the early 2000s, Nokia supplied four out of ten of the world’s mobile phones. The impact on Finland was enormous with the company contributing a quarter of Finnish growth from 1998 to 2007. During this period 30% of the research and development spending in Finland was attributed to Nokia; they generated nearly a fifth of all the exports from Finland; and they were paying almost a quarter of all Finland’s corporation tax.

The circular flow of income shows how money, goods and services flow around an economy.

Circular flow of goods income

Circular flow of goods income (Photo credit: Wikipedia)

The multiplier occurs as injections of demand for goods and services into the circular flow of income stimulate further rounds of spending. One person’s spending is another person’s income. This can lead to a bigger eventual final effect on output and employment than the initial input amount. The value of the multiplier is the number of times a rise in national income exceeds the rise in the injections of demand that caused it.

At its peak there were over four thousand highly skilled workers on the site at Tampere and the impact on the local economy was enormous. Many of these employees spent their wages on new houses, which gave the construction business a boost. The workers building the houses spent their wages in the local economy. This is a good example of the positive multiplier at work.

However, the rise of the iPhone from 2007 had a negative effect on Nokia. After many rounds of job cuts, the smartphone business was sold to Microsoft in 2014. To add insult to injury, Microsoft took over Nokia Oyj’s glass-walled headquarters, one of Finland’s best-known buildings, and the job cuts continued.

In Tampere the effects of the negative multiplier were obvious. The universities who relied on collaboration with Nokia had to cut back, the subcontractors who depended on Nokia went out of business and many local people employed by Nokia lost their jobs.

The small company from Finland no longer strides across the world stage. In Tampere, future growth in income may depend on small innovative and creative start-ups.

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Gerry Reilly, Senior Teaching Fellow About Gerry Reilly, Senior Teaching Fellow

Senior Teaching Fellow, delivers the on-campus Economics seminars and is part of the Strategic Planning teaching team.