Scott McCulloch is editor of Families in
Foreign direct investors have a welter of industrialised countries to choose from but many markets stand in stark economic contrast with each other. Scandinavian countries are no exception
Investing in Scandinavia virtually means investing in Sweden. The Swedish government, the press and local businesses treat foreign investors as they do Swedish investors. The media is quick to point out foreign ownership, however, when layoffs or plant shutdowns are announced.
Non-Swedish businesses are expected to adopt Swedish rules and practices, including the annual submission of company accounts, employee representation on boards of directors and local labour 'co-determination'. Problems can develop when such practices are not adopted, and many companies have been known to capitulate to the local practice.
It is events like these that cause unease in the boardrooms of corporate Sweden. Many chief executives fear that without bold political action, Scandinavia's largest economy will lose its reputation as a hub for innovation and spawning ground for large international companies. In the past, governments indulged big businesses and industrial owners that tended to reinvest profits in new factories and products that helped transform companies from local operators into multinationals.
So how does Sweden attract foreign investment? In a word – globalisation. Many Swedish companies have merged with foreign firms. For 2002 (the most recent year for complete figures), total net foreign direct investment rose marginally on 2001. Finland was the single biggest investor with €5.7bn, followed by Germany with €2.15bn, the US with €1.42bn and Norway with €1.36bn, according to the central bank. The bank calculated net return on FDI in Sweden at €4.27bn in 2002. Retail companies posted higher returns but manufacturing companies posted lower returns.
Preliminary figures for 2003 show a changing picture. Through September 2003, Finland withdrew €2.03bn in direct investment. Belgium withdrew €1.53bn, after investing heavily in 2002. Ireland withdrew €1.2bn and other (unidentified) countries, €1.2bn. The UK was the single biggest investor for the first nine months of 2003, weighing in with €3.6bn. The biggest loser was the banking and financial sector, closely followed by the pulp and paper sector. More money was invested in the chemical, rubber and plastic sector and some €2.6bn went into real estate management.
The US had the greatest number of employees in Sweden during 2002 (108,126) followed by the UK (59,708) and Finland (53,676) according to the Swedish Institute for Growth Policy Studies. In all, ITPS says there were 8,501 foreign-owned firms in Sweden, with 530,758 employees – about 22% of total employment. Foreigners own companies in all sectors, but foreign ownership in the service sector is growing fastest.
Sweden has open markets in sectors particularly attractive to foreign investors, including energy, telecoms and public transport, and healthcare. Despite the downturn in the telecoms industry, foreign companies in the sector continue to invest in Sweden. Chess, a Norwegian mobile-phone operator, entered the Swedish market in January 2004, hoping to win half a million customers within three years.
Foreign companies may acquire Swedish concerns without prior government approval, and Swedish firms may not restrict foreign ownership of shares. This liberalisation has been further enhanced by membership in the EU. Sweden also has one of the lowest corporate tax rates in Europe, though smaller firms still bear a greater tax burden than larger firms, because they cannot always take the same types of deductions and do not have divisions/subsidiaries to balance out profit and loss the same way.
Foreign firms may list their shares on the Stockholm Stock Exchange and foreign ownership in Swedish-listed companies was steady at about 42% of total ownership in 2003.
From an economic perspective Sweden has weathered the global downturn quite nicely. A strong push from an expansionary fiscal policy in 2002, supported by competitive exchange rates, helped sustain demand while lower interest rates provided an added boost to private consumption in 2003, according to the IMF.
Internally – where bickering over fiscal and labour reforms has become a national pastime – it's a different story. As far back as 1999, captains of Swedish industry – among them senior executives at companies such as Ericsson and Volvo – have been urging rapid and far-reaching reforms. They claim punitive personal taxation and restrictive labour market rules have compromised the country's industrial base. Employers, in turn, cite union intransigence and high labour costs as factors behind the decisions by some companies to shift production overseas.
Sweden certainly has structural problems to address but taken together, they present a challenge rather than a calamity. The prime minister, Goran Persson, after all, oversees a country with negligible inflation. Interest rates are low, even by the standards of the euro zone. Although conditions in the labour market will continue to deteriorate this year, the economy remains fundamentally sound, with the external accounts in surplus. GDP growth is forecast to accelerate to 2.6% in 2004 and 2.7% in 2005.
Norway is blessed with oil. As the world's second-largest oil exporter after Saudi Arabia, Norway is arguably the envy of its Nordic neighbours. The country enjoyed a decade of sustained economic expansion in the 1990s underpinned by broadly accepted prudent monetary and fiscal policies.
The government released its revised 2004 budget in May. The budget increases the non-oil deficit, thereby upholding the administration's moderately expansionary fiscal stance. Strong first quarter growth in retail sales has lead analysts to revise their GDP growth forecasts for 2004 from 2.1% to 2.4%. The Economist Intelligence Unit (EIU) predicts GDP growth to reach 2.9% in 2005.
The offshore oil and gas sector is responsible for a large share of foreign direct investment. In 1999 (most recent available figures), oil and gas extraction accounted for 42% of total inward investment stock. Services accounted for a further 37% and manufacturing the remainder.
The largest single country of origin of inward investment in Norway is the US, where energy companies such as Esso/Mobil and Texaco have presences. The largest investors from other EU countries are Swedish, Dutch, British and French.
Foreign investors have made a major contribution to the development of the energy sector. They are an important source of wealth and contribute to Norway's public finances through high taxation on offshore petroleum production. The impact on employment has been limited – only a fraction of the population (1% of the labour force) is involved in offshore activities or in foreign-owned companies onshore. The importance of the oil and gas industries has made Norway's economy extremely volatile with investment, GDP growth and tax receipts all highly dependent on international energy prices.
As a destination for foreign direct investment, Denmark is neither an investor's dream nor is it a nightmare. Denmark joined the EU in 1973 and its electorate has traditionally been suspicious of deeper political integration with the union. The government was forced to negotiate four opt-outs from the 1992 Treaty on EU (Maastricht treaty) to persuade voters to ratify the treaty in a referendum in 1993.
Denmark began to experience a slowdown in economic activity in 2001, however its economic fundamentals remain sound. Mirroring trends in Europe and abroad, growth in the country over the past three years has been below potential, according to analysts.
The IMF believes the Danish economy will expand by less than 2% this year. Private consumption spending should lead the recovery, as tax cuts increase disposable income, and there should also be positive wealth effects from improving equity markets and the still strong housing prices.
The rebound in consumption in the fourth quarter of last year was a positive sign. However a delay in the turnaround of unemployment (now at 6.4%) could dampen consumer confidence.
The government wants to speed up the process of structural reform of Denmark's local governments. After negotiations with the opposition SDP broke down in May, the prime minister announced that he intended to reach a deal before parliament breaks for the summer recess.
Although the recovery in the euro area remains slow, some countries, notably France, are picking up faster than forecast. Economic commentators no longer expect Denmark's central bank to proceed with another interest rate cut this year.
Meanwhile, retail sales in the first quarter indicate that private consumption continued to grow strongly. The prevailing view among economic commentators is that Denmark's growth in private consumption will come in at 3.1% in 2004, moderating to 2.9% in 2005.
Denmark's economic growth rate over the medium term will depend not only on increasing the labour supply, but also on continued improvements in the competitiveness of product markets. The IMF believes Denmark has made good progress in strengthening competition laws and liberalising markets over the past few years, including the energy sector.
However further improvements are needed particularly as the momentum for product and labour market reform picks up in neighbouring countries. Among others, there are likely to be gains from reform in the construction, transportation, retail and wholesale sectors.
For the investor looking to Finland, the watchwords are labour and reform. Finland's government intends to tinker with the labour market until it gets it right – or at least for this legislative period. The government intends to create 100,000 new jobs by 2007 and has pledged to reduce non-wage labour costs, raise skill levels and increase regional co-operation between employment agencies. Raising the employment rate is crucial to prepare the economy for the impact of an ageing population.
Finland's high rate of unemployment demands still more reforms. The problem, says the IMF, is that high labour taxes and the lack of wage differentiation have made much of the unemployment structural. "This is reflected in its persistence, as well as the high proportion of long-term unemployed and the lack of jobs for low-skilled labour." The unemployment rate is 16.5% compared with the official rate topping 9%, the IMF says.
The EIU reports that economic growth, which stood at 2.3% in 2002, slowed to 1.9% in 2003. This is lower than the boom period of the late 1990s, but higher than the EU average of 0.7%. The analyst predicts GDP growth will pick up in 2004 as a result of moderately increased EU demand for Finnish exports. The strength of any positive stimulus from the external sector will depend on the fortunes of the IT, telecoms and forestry sector.