There is an increasing unanimity in Finland, that the Finnish manufacturing sector has problems with its cost competitiveness. Roughly one half of it can be explained by increases in labour costs exceeding those of the competitors and another half by productivity growth being below that of the competitors. The problem is severe. Moderate wage agreements help but slowly. Recent global economic business trends does not seem promising from the point of view of Finland, either. So, arguably our problems with competitiveness are largely structural in nature.
The current understanding of the reasons and properties of our structural economic problems is largely based on casual analyses and speculative inference. Ignorance of the importance of product varieties may lead to flawed view on the competitiveness and its development. The risk of drawing misguided policy conclusion is obvious and the danger of hampering the renewal of businesses by economic policy is noteworthy.
For better understanding of structural economic problems, knowledge of the mechanisms underlying structural changes is needed all the way down to firm- and product-level. This way the analysis is capable of achieving the layer where concrete managerial decisions are made. With this kind of analysis it is possible to identify which factors hinder and which factors facilitate the improvement of the competitiveness in the economy. The knowledge obtained with this approach provide the only solid ground for policy recommendations on how situation can be improved, what should be the main focuses of the policy, and what type of policy tools should be avoided.
The relationship between competitiveness and product varieties is analyzed with aggregate data for obtaining a macroeconomic perspective. Firm- and product-level data are used for examining underlying micro-level dynamics.