In the last 20 years, foreign direct investments in the world have grown faster than both exports and production and has thus contributed strongly to the globalisation during this period.

Multinational enterprises are dominant in the Swedish business sector

Foreign direct investments are carried out by multinational enterprises (MNEs) – Swedish-owned MNEs and foreign-owned firms. Particularly important are foreign direct investments in small, developed countries, such as Sweden. MNEs play a prominent role in the Swedish business sector; 40 percent of the employees in the business sector are employed by MNEs, they account for 90 percent of the research and development (R&D) in the business sector, and for more than 75 percent of the exports of goods and services.

Functional specialisation within MNEs is conducive to high value added per employee in the Swedish business sector

Since the 1990s, the value chains have become more fragmented, both internationally between countries and nationally between regions. This fragmentation has led to a geographical division and specialisation at different stages (business functions) in the production process (functional specialisation). MNEs are at the forefront in regard to increased functional specialisation. Growth analysis shows that in MNEs in Sweden, the functions before production (design and development), after production (marketing, distribution and after-sale services) and management have increased their share of value added, while production has decreased its share. Since the average wage and share of skilled labour are higher in the former, there has been a shift within MNEs in Sweden towards operations with high value added per employee.

A contributing factor to this is offshoring within MNEs (increased employment in their subsidiaries abroad). Activities where the share of highly skilled labour is low and where the tasks are mostly routine have been relocated abroad. More qualified operations, where the tasks are more non-routine in character, have largely been retained or increased in magnitude in Sweden.

Offshoring within MNEs contributes to increased regional economic difference in Sweden

Functional specialisation and fragmentation also occur regionally within countries. Our analyses indicate that in Sweden, large regions, with rapid employment growth and large shares of highly educated/skilled workers – the large cities of Stockholm, Gothenburg and Malmö − specialise in activities before and after production and management. Smaller regions, however, with slower employment growth and a smaller share of highly educated/skilled workers − especially other regions (local labour market regions (LA-regions with less than 100,000 inhabitants), but to some extent also regional centres (LA-regions with between 100,000 and 300,000 inhabitants) − specialise in production activities. In other words, functional specialisation at the regional level has involved that employment has grown faster in large cities than in other regions in Sweden and that highly skilled, non-routine activities are more concentrated in large cities.

Again, our results indicate that offshoring within Swedish MNEs has contributed to this. The expansion that has occurred in Swedish MNEs’ subsidiaries abroad has been positively related to employment in their operations in the large cities (or has not affected it at all). However, offshoring within Swedish MNEs has had no impact on employment in
their activities in regional centres and in other regions in Sweden (or the relationship has been negative). However, it is obvious that the impact offshoring within MNEs has on employment in their activities in different types of regions varies.

We also find that when Swedish MNEs expand abroad, the shares of skilled labour and of non-routine tasks increase in their activities in large cities, while the shares in regional centres and in other regions are unaffected. This can be interpreted as offshoring within MNEs is driving a development in which activities with a high share of non-routine tasks and which require a high share of highly educated/skilled labour are increasingly concentrated in the large cities in Sweden.

One explanation for this is the effects of agglomeration, as the location of such activities to large cities is favoured by the density in these environments. The increasing concentration in large cities of knowledge-intensive activities has contributed to the recent divergence in economic growth between regions in Sweden (or at least the earlier convergence between regions has ceased).

Foreign acquisitions lead to higher productivity and expansion, especially in acquired small firms in the service sector

Firms that are acquired and become foreign-owned are more productive even before they are acquired and, in addition, they have a higher share of skilled labour than comparable firms in the same industry; foreign-owned MNEs are likely to "cherry-pick". Selection is therefore an explanation of the fact that foreign-owned firms have productivity premiums.

Another explanation is that productivity after acquisitions grows faster in firms acquired by foreign companies than in similar firms that remain Swedish-owned. We find that after the acquisition, productivity increases in acquired small service firms and in large manufacturing companies. The former is particularly interesting in light of the fact that this is the group of firms where most foreign acquisitions occur.

Explanations of the increased productivity may be knowledge and technology transfers from the parent company abroad to the acquired firms in Sweden or restructuring processes within the acquired firms that will start at the time of, and are triggered by, the acquisition. Our results show that in both small service firms and large manufacturing companies, the share of skilled labour after acquisitions is rising, an indication that there is significant investment in human capital in these groups.

Moreover, the results show that there is an expansion after the acquisitions as employment increases (with the exception of large manufacturing companies). A higher export intensity − exports as a share of production – is a sign of that the expansion of sale in the acquired firms appears to take place mainly abroad in the foreign market. Another sign that the acquired firms are becoming more internationalised after acquisitions is that the import intensity − the import share of intermediate consumption − is rising in the acquired firms. Access to a higher quality, and a more varied, range of input goods and services may contribute to positive productivity effects.

Well-designed international investment agreements can have positive economic effects, but old agreements should be modernised and renegotiated

Both outward direct investments − Swedish companies expand their operations abroad − and inward direct investments − foreign-owned companies establish or expand their activities in Sweden − have positive welfare effects. The aim of bilateral investment agreements BITs is to stimulate direct investment, which has been supported by some empirical research.

The criticism directed against this type of agreements has primarily been about the “regulatory chill” − that the agreements involve host countries refraining from introducing regulatory measures that are for some reason desirable. It is argued that this is caused by the agreements imposing too strict restrictions on what host countries can do without having to compensate investors and/or through problems with the dispute resolution mechanisms provided for in the agreements.
This criticism has entailed that some existing agreements have been revised and new agreements have been formulated. The EU, which today has the main responsibility of the investment agreements that affect its members, has been pushing for changes in the substantive undertakings made in the old agreements and for reforming the dispute resolution process.

Today, there are 52 valid Swedish BITs of the older, more traditional, type of agreement. Among the countries with which Sweden has such agreements are some fast-growing countries outside the EU that are already today, and could become in the future, significant investors in Sweden. This applies not only to China but also to Russia, Turkey and Korea. To the extent that the EU will not revise and renegotiate these agreements, there is reason for Sweden to take the initiative and do that, so that the country offers the same protection as does the newer EU agreements, such as CETA. In some cases, where Sweden has BITs with small, poor countries in which the markets are small and where direct investments are negligible and likely to remain so even in the future, there are reasons to consider whether the agreements should be terminated altogether or at least be renegotiated.