The number of foreign acquisitions has increased, especially in the service sector

During the late 1990s, the share of employees in foreign-owned companies increased sharply as the result of a number of large Swedish multinational enterprises (MNEs) becoming foreign-owned. Since then, however, the share has been almost constant. However, the number of foreign acquisitions has increased significantly since the turn of the millennium. We find that, recently, it has mainly been smaller firms in the service sector that have taken over.

Foreign-owned firms in Sweden have higher productivity than non-MNEs, particularly small firms that are a part of foreign MNEs
Foreign-owned companies (and MNEs in general) are more productive than non-MNEs in the same industry; the former has a productivity premium. One explanation of the productivity premium is that foreign-owned companies have owner-specific assets that make them more productive. Such owner-specific assets could be a unique product or production process, strong brand, rumours of good quality or access to international production and marketing networks.

We also find that MNEs are larger than other enterprises and more capital-intensive − both in terms of human capital and physical capital. Even when we take this into account, a considerable productivity premium (15 percent) still remains in foreign-owned firms in the Swedish business sector. Moreover, the premium is higher for small firms (those with less than 50 employees).

Acquired firms have high productivity and high shares of skilled labour prior to acquisitions

Foreign-owned companies tend to acquire small firms that have high productivity and large shares of highly educated employees prior to the acquisition, which means that the productivity premium observed in foreign-owned firms is partly explained by selection; foreign acquirers are likely to "cherry-pick" firms to acquire.

Foreign-owned companies have taken over Swedish service firms in Stockholm

The probability that firms in the Swedish service sector will be acquired is higher if they are located in Stockholm. This is especially true for smaller firms. The reason for this might be that knowledge-intensive service firms operate to a greater extent in large cities such as Stockholm. A motive for acquisitions is not only to gain access to the knowledge of the acquired company but also to benefit from the knowledge that exists in surrounding companies in the region, and such knowledge spillovers are more often found in dense regions.

The location to a large city also makes potential takeover targets more exposed to foreign acquirers and better positioned as a platform for foreign firms intending to enter the Swedish market.

Foreign acquisitions have positive effects on productivity, especially in small acquired firms in the service sector

Another explanation for the productivity premium in foreign-owned firms is the transfer of knowledge and technology within a multinational enterprise, that is, from the parent company abroad (with its owner-specific assets) to acquired or newly established firms in Sweden. This means that productivity grows faster in firms acquired by foreign companies than in similar Swedish-owned firms.

We find that productivity increases faster after acquisitions in small acquired service firms (those with less than 50 employees) and in large manufacturing firms (those with 50 employees or more). Particularly prominent is the effect in the former; five years after the acquisition, small acquired service firms have more than 12 percent higher productivity than firms that have not been acquired by foreign companies. Notably, small service firms make up the group of firms in which most foreign acquisitions occur.

Firms acquired by foreign companies invest in human capital and expand

Our results show that the share of skilled labour increases in small service firms and in large manufacturing firms after acquisitions. This indicates that the positive productivity effect in these firms may be a result of increased investment in human capital. Additionally, in small acquired manufacturing firms, the share of highly educated labour after acquisitions is increasing.

Faster productivity growth in a firm that is acquired by a foreign-owned company can thus be the result of restructuring processes within the acquired firms, triggered by the acquisition itself. These restructuring processes may include increased investment in human capital, better utilisation of economies of scale in connection with expansion, and increased exports and imports.

Foreign acquisition facilitates the acquired firm’s opportunities for expansion. Fewer financial constraints might be a reason for this. An indication that an acquired firm expands after takeover is that its number of employees increases. Above all, positive employment effects after acquisition appear not only in small service firms but also in smaller manufacturing firms. In addition, we find such effects, to some extent, in large service firms.

Foreign acquisitions lead to increased internationalisation in acquired companies

By taking advantage of foreign acquiring firms’ international network and organisation, it becomes easier for acquired firms to sell in the foreign market. The positive effect of foreign acquisitions on shares of exports (export intensities) in acquired firms suggests that sales increases in acquired firms primarily appear in foreign markets. This effect emerges particularly in small service firms and in large manufacturing firms.

Moreover, the share of imports in intermediate consumption − the import intensity − increases in the acquired companies after acquisitions, which is the case in all types of firms. Access to a higher-quality and a more varied range of inputs and services may contribute to positive productivity effects.

In sum, our results consistently show that the clearest effects of foreign acquisitions are found in small service firms, both in terms of the impact on productivity and on the factors that lead to restructuring.