Unveiling Finland’s Digital Economy: 7% of National Value Added, EUR 14.9 Billion in Digital Industries (2018)

In Finland, the digital economy produces about seven per cent of the nation’s value added. The first comprehensive calculations of our digital economy suggest that digital service production is especially pronounced in Finland. For now, the calculations remain experimental.

While digitalisation has become more significant in our society and economy, its analysis in economic statistics has not been very precise or comprehensive. One reason for this is the widespread effect digitalisation has on the economy across all industries, which makes the phenomenon complex to define.

So, digitalisation as a phenomenon is included in economic statistics, but it is not clearly visible. This issue is addressed by the supply-use tables for the digital economy.

Instead of a single estimate of the scale of the digital economy, the purpose of the supply-use tables for the digital economy is to present multiple perspectives into how digitalisation affects the economy. The framework we have calculated makes it possible to analyse how the key goods and services for digitalisation are produced and used in different industries, and how prominent the key functions of digitalisation are in Finland’s gross domestic product. The framework illustrates digitalisation by defining new categories of digital industries and digital products, as well as digital ordering and delivery methods for products.

“Products” refers to a product framework of national economy supply and use tablesSiirryt toiseen palveluun. that describes the inputs and resulting outputs of Finland’s national economy using more than 800 different products. The products include both physical goods and services.

The reference year for the supply-use tables for the digital economy is 2018. The reason for the old reference period is the slow production of supply and use tables for the national economy, and the chosen year allowed international comparisons of the calculations. The economic significance of digitalisation has probably continued to grow since then.

Regardless of this potential underestimation of the digital economy in terms of today, our calculated data allow the structure of digitalisation to be analysed in many ways. Hopefully, our calculations can offer useful new information about the digital economy in Finland.

The size of the digital economy in Finland has been calculated before at least by ETLA Economic Research (2020), but ours is the first balanced supply and use table for the digital economy in Finland based on the OECD’s (2019) international standards, which are still being developed. In addition, our calculations are based on the concepts and definitions of national accounts, which makes the data more comparable.

This work was funded by Eurostat, the Statistical Office of the European Union. Our calculations are experimental and include substantial uncertainties in places. We therefore present the data at an aggregate level in this article, and they should be used with caution.

All figures are presented at current prices. For detailed descriptions of the methods and source material, please contact the authors.

New industries describe different areas of digitalisation

The supply-use tables for the digital economy include seven new categories of the digital economy industries: digitally enabling industries; digital intermediary platforms charging a fee; data and advertising driven digital platforms; firms dependent on intermediary platforms; e-tailers; digital only firms providing financial and insurance services; and other producers only operating digitally. (Table 1)

These industry categories are used to describe comprehensively key economic production related to digitalisation and illustrate the different connections of the digital economy.

Source: OECD 2019

In total, the new categories of digital industries produced EUR 14.9 billion in value added, corresponding to 7.4 per cent of the national economy’s value added. This is roughly equivalent to the value added produced by the construction industry in the same year. The largest industry by value added (at the character level), which was manufacturing, produced 17 per cent of Finland’s value added in 2018.

In other words, the value added produced by these digital industries was above average and played a major role in Finland’s gross domestic product, even though the industries were not quite among the largest producers (Figure 1). However, digital inputs are used widely by all industries, and they are very important for industrial production, for example.

Digitally enabling industries is the largest category of the new digital industries. It includes companies that enable the functions of the digital economy. For example, this category includes software houses, manufacturers of information technology devices and wired and wireless online services.

In 2018, digitally enabling industries produced EUR 27.4 billion worth of products and services for Finland’s national economy and created EUR 12.5 billion of value added for Finland. The share of these industries of the total value added of digital industries was 84 per cent, making digitally enabling industries a major part of the value creation of digital industries.

E-tailers were the second largest digital industry in 2018. This category includes wholesalers and retailers that primarily sell their goods or services online. Online wholesalers and retailers may take offline orders, but at least 50 per cent of their orders must be online for the company to be included in this category. The output of e-tailers amounted to EUR 4.3 billion, producing EUR 2.1 billion in value added, which was 14 per cent of the value added created by digital industries.

Source: Experimental calculations by Statistics Finland, supply-use tables for the digital economy 2018.

The rest of the new digital industries had a rather marginal impact on Finland’s economy. Although prominently in the spotlight in recent years, digital platforms only produced about EUR 70 million in direct value added in 2018 according to our calculations. In this instance, “digital platforms” refer to both “data and advertising driven digital platforms” and “digital intermediary platforms charging a fee”.

The indirect effect of these platforms was probably greater, as is suggested by the value added produced by firms dependent on intermediary platforms, which was twice that of the digital platforms themselves.

A firm is considered to depend on intermediary platforms if the majority of its demand is conveyed by digital intermediaries. This category is divided into incorporated and unincorporated firms. Incorporated operators include hotel chains that utilise digital intermediary platforms, for example. Unincorporated operators include accommodation and food delivery services offered by private individuals, for example.

It is possible that the importance of digital platforms for Finland’s economy has grown since the reference year, but based on the current calculations, the platform economy was not a significant factor for the national economy in 2018.

One explanation for the relatively small share of platforms in the digital economy is that some of them are foreign entities and therefore excluded from the value added in Finland. Payments made to these platforms, including fees, count as services imported to Finland. Measuring the phenomenon also involves considerable uncertainty, especially in the case of unincorporated firms dependent on intermediary platforms.

According to value added, digital only firms providing financial and insurance services were a somewhat larger industry than platforms. This category only includes companies with completely digital operations, excluding conventional financial and insurance institutions, even though finance and insurance are highly digitalised in Finland.

Other producers only operating digitally were excluded from the analysis because these entities are quite difficult to identify. Because some similar services are produced as part of companies’ non-digital core business, they are unrecognisable as discrete functions, excluding the operators from the category. In addition, many well-known operators such as streaming services are foreign entities, whereby they are not included in Finland’s value added but are considered imported services.

Digital services comprise the majority of digital products

The supply and use tables describe the economic production processes in more detail than other national accounts – they allow the production flows of goods and services to be analysed. In other words, the economy’s industries represent distinct production methods that produce physical goods or services from different resources. For the purposes of this matrix analysis, it was necessary to create new essential product categories related to digitalisation that describe the significance of digital products for the national economy as a whole.

There are four new digital economy product classes: ICT goods; priced digital services; priced cloud computing services; and priced digital intermediary services.

Among these, the reclassification of ICT goods and priced digital services was fairly straightforward. We were able to use the existing product categories of the national accounts supply and use tables for our calculations more or less directly. Meanwhile, such clear methods and data sets do not exist for calculating priced cloud computing services and priced digital intermediary services. As a result, their calculations pose unique challenges and involve new methodological solutions.

In terms of supply and use, the largest of the new digital products is priced digital services, the output of which was EUR 20.7 billion in Finland in 2018 (Figure 2). This product category includes e.g. ICT goods manufacturing services, software and licensing services, consultation services related to ICT goods, data transmission services, ICT goods renting and other ICT services. Imports of these services amounted to EUR 3.7 billion, resulting in a total supply of EUR 24.4 billion.

ICT goods had the second largest supply of digital products. This is especially explained by the value of imports, EUR 6.3 billion. Domestic output accounted for EUR 1.9 billion of ICT goods, which was less than cloud services.

By definition, “ICT goods” include those products that are primarily used in digital information processing and communication, such as information technology and mobile phones.

The high value of ICT goods imports in relation to goods produced in Finland reflects how global value chains have shifted the production of these products to less expensive or more specialised countries. This has also increased the importance of service production, including digital products. This is evidenced by the fact that Finland’s domestic production of priced cloud computing services had already eclipsed ICT goods in 2018.

Roughly speaking, there are three main categories of priced cloud computing services: 1) Software as a Service (SaaS); 2) Platform as a Service (PaaS); and 3) Infrastructure as a Service (IaaS). We did not break down how domestic production in Finland is distributed among these categories.

The output of priced cloud computing services was valued at EUR three billion, which is about 0.7 per cent of Finland’s total output. The imports of priced cloud computing services amounted to EUR 500 million. It is likely that the value of both domestic output and imports has increased further, as both businesses and households have significantly increased their use of priced cloud computing services since 2018.

The output of priced digital intermediary services was valued at approximately EUR 110 million, which is equivalent to the industry defined as digital intermediary platforms charging a fee. It should be noted that this figure excludes imports and therefore presents an incomplete picture. The imports of priced digital intermediary services may be considerable, as the industry’s largest companies are foreign corporations. We were unable to calculate reliably the value of the imports with the data sources at our disposal.

Majority of digital products were used as intermediate products domestically, and domestic intermediate consumption accounted for about half of total digital product use. Intermediate consumption consists of the value of the goods and services consumed as inputs in a production process, excluding fixed assets where consumption is recorded as the consumption of fixed capital.

The industry which most used digital services as intermediate products was digitally enabling industries. These industries were responsible for 30 per cent of all consumption of digital services as intermediate consumption in production. The next largest users of digital services were manufacturing (13%), public administration and national defence (11%), and financial and insurance institutions (11%).

The intermediate consumption of ICT goods was more clearly divided between two industries. Again, digitally enabling industries used most of the ICT goods in their own production, accounting for 29 per cent of all intermediate consumption of ICT goods. The next largest user of these production inputs was manufacturing at 25 per cent. The share of other industries in the intermediate consumption of ICT goods was much less than 10 per cent per industry.

Domestic final use was valued at EUR 10.9 billion, exceeding imports by about EUR 0.8 billion. ICT services were the largest product group in domestic final use (EUR 6.5 billion), and these services were also the largest group of exports among digital products (EUR 6.6 billion). (Figure 3)

The relatively low significance of ICT goods, according to the definition used, for Finland’s economic production is reflected by the value of exports, which was EUR 2.5 billion in 2018 – much less than the value of priced digital services exports. Priced cloud computing services were exported to the tune of EUR one billion.

The significance of digital products is better understood when analysed as shares of all products cycled through Finland’s national economy (Figure 4). All in all, digital products accounted for about six per cent of the goods and services produced in Finland in 2018. This is notable because the outputs of the forest and paper industries had a smaller share, for example.

The share of digital products in the intermediate consumption of all products was 8.2 per cent. Their exports accounted for 11.2 per cent of all exports of goods and services, and their imports accounted for 11.7 per cent of all imports.

Although the volumes of digital product exports and imports are similar, they differ in structure as explained above.

The new categories of digital products may not fully capture the role of digitalisation in physical products because many products with important digital properties are excluded from the definition of ICT goods used here.

Digitalisation transforms methods of ordering and delivery

Digitalisation has also introduced changes to the economy in how goods and services are ordered and delivered. Digital trade has swept across all industries. To monitor this development, the supply and use tables for the digital economy include the transaction type as a new dimension.

The transaction type determines whether a product’s order or delivery was digital or non-digital. Table 3 presents the forms of ordering methods used in supply and use tables for the digital economy. The problem here is that data sources lack coverage and precision, making it impossible to calculate figures beyond the primary categories A and B.

“Digitally ordered” refers to orders for goods and services placed over a computer network. The payment and delivery methods are irrelevant. This definition excludes orders by regular email or phone but includes business-to-business electronic data interchange (EDI) orders, for example. This is equivalent to the OECD (2011) definition of digital trade.

Our estimate is that in 2018, about 14 per cent of Finland’s economic output was digitally ordered. This estimate may be low because we could not establish a division into digital and non-digital service orders for public administration products, for example. Calculations were produced at the product and industry levels.

For households, the share of digitally ordered goods and services was about nine per cent. At the product level, digitally ordered products had the largest share in product categories related to travel, renting and culture.

The division of delivery methods into the digital and non-digital poses problems. Only services may be delivered digitally. The digital method of delivery applies not only to digital products such as cloud services but also education and gambling, for example.

In theory, highly versatile analysis of product-level data is made possible by classifying products according to their method of order and delivery. In practice, the assessment of the delivery method in particular is extremely difficult due to scarce source data. We therefore refrain from giving an estimate of delivery methods in this instance.

Comparing Finland’s digital economy to other countries

In Finland, the share of the digital economy (7.4%) of the national value added was relatively similar to other countries which produce these data using nearly corresponding methods.

The share of value added was eight per cent in the Netherlands, which produced its own supply-use tables for the digital economy for 2018 according to the same OECD instructions (CBS, 2021).

In the United States, the digital economy had a share of 9.4 per cent of total value added in 2018 (BEA, 2022a). It is hardly surprising that the share of digitalisation was greater in the US given that the world’s largest corporations operating in digital industries are based in the US.

In Canada and Australia, the share of the digital economy of value added was 5.4 per cent (Statistics Canada, 2021) and 5.6 per cent (ABS, 2022), respectively. Both used supply and use tables for their calculations.

The role of digital service production is pronounced in Finland, amounting to about 81 per cent of digital product output. This is very dissimilar to the Netherlands, for example, where the share of digital services was 53 per cent, and the share of ICT goods was as high as 28 per cent of digital product output (CBS, 2021).

In Finland, the share of ICT goods was a meagre seven per cent of our digital product output. In addition, the demand for digital products in Finland is less strongly export-driven than in the Netherlands, where exports clearly had the largest share of digital product demand.

Limited conclusions should be drawn from comparing individual countries, especially when their calculations are still quite experimental. Furthermore, different countries use slightly different definitions for their digital economy calculations. Only the Netherlands has employed exactly the same definitions as Finland. Regardless of the above, these comparisons do offer a benchmark for comparing Finland’s digital economy.

In future, it would be of interest to continue the development of the methodology for the supply and use tables of Finland’s digital economy and to build a time series of the digital economy. This is especially pertinent because the importance of digitalisation has been further emphasised by the increased teleworking and demand for digital services spurred by the COVID-19 pandemic.

For example, the digital economy of the US has grown much faster than the rest of its economy in recent years, amounting to 10.3 per cent of the total economic value added in 2021 (BEA, 2022b). The trend is unlikely to slow down soon in light of recent developments in artificial intelligence. It would be interesting to monitor this development regularly in Finland as well.