Foreign acquisitions in the Swedish business sector – threat or opportunity?
Over the last two decades, foreign direct investment (FDI) has grown faster than both exports and production. In Sweden, the share of the workforce employed in foreign-owned firms rose rapidly in the late 1990s; throughout the 2000s and 2010s it has been relatively constant. This does not mean that only a few foreign acquisitions and greenfield investments take place each year in the Swedish business sector. After the turn of the millennium, the entry of new foreign firms per year has rather increased. However, in recent years there have not been as many spectacular foreign acquisitions of large Swedish multinational companies as in the late 1990s. Both acquisitions and greenfield investments recently have been on a smaller scale.
Compared with other OECD countries, foreign ownership in Sweden is quite high and it is higher in manufacturing than in the service sector. The main ownership countries are large developed economies, such as the United States, and neighbouring countries, predominantly the Nordic countries. In recent years, China has emerged as an important ownership country. Additionally, some smaller countries with preferential tax legislation − Luxembourg and Guernsey − have become more prominent.
Foreign ownership is more prevalent in the metropolitan regions of Stockholm, Gothenburg and Malmö, and the concentration to these regions has been increasing. The growth in employment in foreign-owned companies is largely a result of acquisitions; however, the entry of new foreign firms, i.e. greenfield investments, is the most common form of establishment.
Foreign-owned firms are more productive
Foreign-owned (multinational) firms are more productive than domestic firms, and the differences in productivity are significant. The productivity premium in foreign-owned firms is 31 percent, even when other factors that may affect productivity, such as share of skilled labour and firm size, are controlled for. An explanation for this is that foreign-owned firms have owner-specific assets that make them more productive, such as a unique product or production process, strong brands, a reputation for good quality, or access to international production and marketing networks.
Foreign acquisitions have positive effects on productivity…
Swedish firms that are acquired by foreign companies are usually already relatively productive and have a high proportion of skilled labour (cherry picking). Also, it appears that the acquired firms’ productivity increases after acquisition (direct productivity effects). An explanation for this might be technology and knowledge transfer from the foreign multinational company to the acquired firm. Another is productivity-enhancing restructuring, for example, larger investments in machinery and equipment and increased imports of inputs following the acquisition. In addition to these direct effects, there seem to be indirect productivity effects in the form of knowledge spillovers from foreign-owned firms to surrounding domestic firms. In particular, this applies to firms that are upstream in the production chain relative to the acquired firm.
. . . and on employment
The econometric analysis of the effects of foreign acquisitions on employment in acquired firms indicates that employment increases (with the exception of large manufacturing firms), and the greatest impact on employment is found in the service sector. Moreover, the composition of the targeted firms’ employees changes in the sense that the share of skilled labour rises. This might be explained by transfers of knowledge and technology from the acquiring, foreign-owned multinational companies. It could also be a result of organisational changes that the acquisitions give rise to. Both factors lead to an increase in the relative demand for skilled labour.
Wages increase in acquired firms
The econometric analysis shows that foreign acquisitions have a substantial positive effect on average wages in acquired firms. One reason for this is, of course, the rise in the share of skilled labour after acquisitions. Another reason might be that new personnel recruited from domestic firms (non-multinationals) to foreign-owned firms receive relatively high wage increases as compared to those moving between two domestic firms. On the other hand, there is only a marginal effect on wages of individuals who worked in firms prior to foreign acquisition and thereafter remain employed in the same firm.
Foreign owned firms pay higher wages, but jobs are more insecure
Foreign-owned firms are more productive than domestic firms, giving them an opportunity to pay higher wages. One reason they pay higher wages may be to reduce the turnover of labour in the firm and thereby diminish the risk that firm-specific knowledge spreads to competitors when employees move to other firms. The wage premium in foreign-owned firms in relation to domestic firms is 6.5 percent. The wage premium decreases to 3.5 percent if certain firm characteristics are controlled for, such as firm size and share of skilled labour. The wage premium is clearly higher for skilled labour. It is also noteworthy that both wage and productivity premiums are significantly higher in smaller firms with fewer than 50 employees. There are indications that jobs in foreign-owned (multinational) firms are more insecure than jobs in domestic firms. It is possible that foreign-owned (multinational) firms pay higher wages than domestic firms to compensate for this.
Subsidies dubious − promotion justified
Positive effects of foreign acquisitions on both productivity and wages are arguments for welcoming rather than restricting inward FDI.
It is more doubtful if subsidies are a useful means of attracting FDI. Certainly, there are studies pointing to the existence of knowledge spillovers from inward FDI, which would justify subsidies, but the empirical evidence so far is by no means unambiguous. In addition, the problem of a subsidy is always that it is difficult to determine whether an investment would have been carried out in the absence of the subsidy (deadweight effect). It could be argued that competing for inward FDI with other countries should rather be done by providing sound conditions for doing business in the country, such as supplying access to skilled labour, developed infrastructure, and well-functioning institutions.
Public involvement in investment promotion is less controversial. The purpose of investment promotion is to reduce the cost of investing in a country by providing information about business opportunities and the conditions for conducting business in the host country. Investment promotion activities also include helping overseas investors deal with bureaucratic procedures in the host country. In Sweden, Business Sweden is responsible for the publicly funded investment promotion. This report neither discusses whether these activities are presently funded at an appropriate level nor whether they are carried out efficiently.