As we will see, an unplanned increase in inventory is likely to reduce output by a larger proportion than the reduction in investment expenditure. This can have pronounced effects on the overall level of output, especially for large industries that have a significant contribution to their country’s GDP. Let us take the example of the Finnish company Nokia. Up until 2007, the mogul mobile phone producer supplied nearly 48 percent of the world's mobile phones. At the national level, it accounted for 4 percent of Finland’s GDP, 21 percent of total exports, and 14 percent of corporate tax revenues. However, Nokia’s fortune reversed in 2007 with the advent of Apple’s iPhone and other Android devices. The decrease in global demand resulted in a disequilibrium due to the accumulation of unplanned inventory. Nokia responded by massive production cutbacks and several rounds of immense layoffs.

This decline in production slashed its global market share from 46.7 percent in 2007 to a mere 1 percent in 2017. Further, its share of market capital in Helsinki's stock exchange plunged from 70 percent to 13 percent during the same period.

As for backward linkages, since many industries, such as electronics manufacturing, research and development, software, wholesalers, and retailers, depended on Nokia, the impact on the Finnish economy was immense. Studies show that at least 20 percent of the reduction of total employment between 2008 and 2016 is attributed to the “Nokia effect,” while the rest is due to the Global Financial Crisis of 2008. The prolonged structural unemployment and collapsing household incomes that followed caused an economic slowdown. By 2016, Nokia was contributing to less than 0.4 percent of Finland’s gross GDP. The takeaway from this case is that a nation’s dependence on a single company or industry can be quite risky because, in the event of corporate mismanagement or market failure,  it can cause severe macroeconomic damage. Therefore, diversification is key in a nation’s industrial policy to protect the economy from shifts in technology, swings in consumer behavior, changes in competitive advantage, or economic meltdowns.

Question

Do you think that during its golden years from 1998 to 2007, Nokia had unplanned inventory levels? How would this have impacted the overall level of Finland’s GDP?

Transcribed Image Text:

71