Foreign operations of Swedish Manufacturing Firms

Pehr-Johan Norbäck Pehr-Johan Norbäck

The Research Institute of Industrial EconomicsThe Research Institute of Industrial Economics (IFN) IFN)

Outline:

1. Why study Multinational Enterprises (MNE) and Foreign Direct Investments (FDI)?

2. The IFN survey on the foreign activities of Swedish Multinational firms

3. How is the survey used in research

4. Discussion

1. Why study FDI?

Source: Blonigen, 2007

1. Why study Foreign Direct investment?

FDI has grown tremendously!

What explains the increase in FDI?

Theory (vertical, horizontal, platform FDI) Empirical work (estimate the importance of these explanations)

Policy implications?

• Host country (recipients of FDI: China)

• Home country (headquartering MNEs: Sweden)

2. The IFN survey

Outward stock of Swedish FDI (Swedish firms investing

abroad)

0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2004

% of GDP

Sweden

Industrialized countries

Source: World Investment Report 1997, 2005.

Sweden

Industrialized countries

Early concern for exports of Swedish jobs to low-wage countries

3. The IFN (IUI) Survey

PurposePurpose

Investigate the extent and direction of the foreign operations of Swedish Multinational Firms (MNF).

Firms includedFirms included

All Swedish manufacturing firms with more than 50 employees and at least one majority-owned affiliate

2. IFN-survey, cont: Definitions

Parent Firm: company which is registered in Sweden and which is not an affiliate to a foreign or Swedish firm.

Affiliate: company in which the parent firm holds directly or indirectly more than 50% of the voting rights

Producing affiliate: production of goods (extraction, manufaturing or assembly)

Sales affiliate: sales, installation and services.

- :.

The Process

Parent Company

IFN

Affiliate

A-form

B-form

Number of firms and affiliates

Table 4.1 Number of foreign affiliates and affiliate employees in survey MNEs.

Year

Parents answering

Questionnaire A

Affiliates

answering

Questionnaire B

Affiliate

employees

according to A**

Affiliate employees

according to B***

1974 108 480 290200 221111

1978 122 567 309030 227149

1986 108 646 363383 259823

1990 120 871 654167 440879

1994 132 1378 370257 531994

1998 118 703* 424850 223061

2003 62 1579* 456619 404268

Source: IUI database. Notes: *Includes observations from one MNE that reported data per country instead of per affiliate . **Total number of employees abroad as reported in A. ***Sum of employees in the reporting affiliates.

Hakkala and Zimmerman, (2005)

Turnover and exports

All firms

Employment

Firms with producing affiliates

Accounting

Investments,

Capital, assets

Technology:R&D, licenses,

cooperation

Additional:

Classifications,

wages, skill-level

Distribution

Sales, exportsemployment

The A-form: Parent company

The A-form:

Link to Statistics Sweden (SCB)

”Ericsson”

A:1

FORM A CONFIDENTIAL ACTIVITIES OF SWEDISH MULTINATIONAL ENTERPRISES ABROAD 1998 THE RESEARCH INSTITUTE OF INDUSTRIAL ECONOMICS (IUI) BOX 5501, SE-114 85 STOCKHOLM, SWEDEN TEL.: +46 8-783 84 01 (switchboard) FAX: +46 8-661 79 69 CONTACT PERSON: Marie Hesselman, Tel: +46 8-783 84 06, E-mail: MarieH@iui.se This form should be returned before April 30, 1999 to the Research Institute of Industrial Economics. NB: Please include a copy of the Annual Report 1998 for the company/group of companies. Form A: Details of the company/group of companies in Sweden and its interests abroad. Please read the instructions before completing the questionnaire.

IUI code (to be filled in by IUI)

1. Name and address of the company/parent company:

NAMN

MBID

Organization number:

ORGNR

Has the company changed its name since 1994? If so, state the old name here:

2. Contact person:

Tel: Fax:

E-mail:

Composition of sales

Composition of employment

(Sweden vs abroad)

A:2 Code

1. Industry classification for the company’s/Swedish company group’s main activity Give the sector code as defined in instructions VIII:1. NB: One code only.

SNI / BRAN98

Number 1998

2. (a) The number of affiliates abroad ANTDB

(b) of which production affiliates See instructions, III. For each such affiliate, form B should be sent in.

ANTPROD

If your answer on question 4a is 0 (null), please skip all questions with notes stating that they are not to be answered by companies without foreign activities.

Number 1998

3. (a) Total number of group employees Average number of employees during the year in full-time equivalent. See instruction, VIII:2.

ANSTTOT

(b) Of the above, the number of employees in Sweden NB: Not to be answered by companies without foreign activities.

ANSTSVE

MSEK 1998

4. Total external revenues of the group Invoiced sales plus other operating revenues. All sales within the group should be eliminated.

OMSTOT

5. External revenues of the Swedish segment of the group External revenues in Sweden plus total invoiced exports. Total invoiced exports is defined as external export plus sales to foreign affiliates. NB: Not to be answered by companies without foreign activities.

OMSSVE

6. (a) Total invoiced exports from the Swedish segment of the group See definition in question 7.

EXPSVE

(b) Of the above, amount from sales to foreign affiliates

NB: Not to be answered by companies without foreign activities. EXPFRS

7. Group’s total external revenues from abroad NB: Item 9 = items 6 - 7 + 8a NB: Not to be answered by companies without foreign activities.

OMSUTL

Composition of employment abroad:Table 4.7 Most important countries for affiliate employment (share in total employment abroad).

1974 1978 1986 1990 1994 1998 2003

1 USA 6 9.2 19.1 20.4 22.3 22.1 22.1

2 Germany 15.3 13.5 10.7 16.8 12.1 13.3 8.5

3 France 13 10.3 6.9 4.8 5.6 6 8.5

4 Italy 8.1 6.9 11.6 9.3 11 10 6.1

5 United Kingdom 7 9.6 6.2 9.4 8.4 5.3 5.6

6 Brazil 9 10.6 5.8 3.9 4 4.8 4

7 Finland 3.7 3.4 2.9 2.4 1.3 2.2 3

8 Norway 1.6 1.5 2.3 3.4 2.2 1 2.8

9 Poland 0.1 0.9 1.7 2.8

10 Belgium 3.7 4.1 3.4 2.3 3.4 3.6 2.6

11 Spain 2.7 2.9 3.1 3.1 2.9 2.1 2.6

12 China 0.7 1.3 2.5

13 Czech Republic 0.6 0.3 2.5

14 Denmark 3.5 3.3 4.1 3.6 3 2.7 2.4

15 India 5.7 1.5 1.8 1 1.8 2.2 2.4

16 Australia 3 1.9 2.5 1.8 1.6 1 2.3

17 Netherlands 3.8 5.8 3 2.8 3.4 2.4 2.1

18 Canada 1.7 1.8 1.6 1.9 1.3 3.5 2

19 Mexico 2.1 2 2.6 1.8 1.5 2.1 2

20 Argentina 1.2 1.6 1.1 0.8 0.9 0.9 1.5

21 Hungary 0.1 1.9 1.4 1.1

Source: IUI database. Hakkala and Zimmerman, (2005)

R&D

Marketing

Additional information on request/special topic

(varies by survey)

A:8

Answer questions 19 and 21 both for the entire group and for the Swedish segment of the group. Question 20 is only to be answered for the entire group.

MSEK 1998

The entire group

Swedish segment of the group

NB: Not to be answered by companies without

foreign activities.

1. (a) Capital expenditure Relates to gross investments in machinery, equipment and buildings and should include the initial values of machinery, equipment and buildings for companies acquired in 1998. Acquired companies are companies in which the group has acquired at least 50 percent of the equity stock.

INVTOT

INVSVE

(b) Of the above, the amount reflecting initial values of machinery, equipment, and buildings for companies acquired in 1998

INGTOT INGSVE

2. (a) Marketing expenditure Includes both internal costs for the marketing department and to external costs, such as the purchase of marketing services or advertising costs. Make a reasonable estimate.

MFTOT

(b) Of the above, amount reflecting advertising costs REKTOT

3. Expenditure on research and development (R&D) Excluding payments between companies in the group. R&D expenditure refers to both current expenses and depreciation on capital equipment for R&D. Include both in-house R&D and R&D commissioned to third parties. In the second column, give the amount of R&D expenditures for R&D carried out in Sweden. (As defined by Statistics Sweden; see instruction, VIII:4.)

FOUTOT

FOUSVE

Yes

No

4. (a) Did the group cooperate in any R&D matters with companies not belonging to the group? Relates both to formal cooperation, such as joint ventures, and informal cooperation, but not cooperation with universities. Check the appropriate box.

FOUJV=1

FOUJV=2

(b) If Yes, give a reasonable estimate of the percentage of the group’s total R&D expenditure (question 3) that is associated with such cooperation

FOUJVPCT

%

A:9

1. Give a reasonable estimate of the share of the group’s total R&D expenditure (question 21) that is associated with:

Product related R&D. Development of new, and improvements of existing, products.

FOUPD

%

FOUPC

%

Process related R&D. Development of new, and improvements of existing, production processes.

Total 100 %

Accounting

Investments,

capital, assets

Technology

R&D

Employment

skills,

wages

Intra-firm trade

Production, exports,

imports from Sweden

The B-form: The Affiliate

Producing affiliates Unique database for Unique database for studying globalization in studying globalization in terms of location decisions terms of location decisions and organization in and organization in Multinational firms!Multinational firms!

Ericsson

Affiliate X

The B-form: The Affiliate Level

Entry mode:

(Acquisition or greenfield entry)

B:1 FORM B CONFIDENTIAL ACTIVITIES OF SWEDISH MULTINATIONAL ENTERPRISES ABROAD 1998 THE RESEARCH INSTITUTE OF INDUSTRIAL ECONOMICS (IUI) BOX 5501, SE-114 85 STOCKHOLM, SWEDEN TEL: +46 8-783 84 01 (switchboard) FAX: +46 8-661 79 69 CONTACT PERSON: Marie Hesselman, Tel: +46 8-783 84 06, E-mail: MarieH@iui.se This form should be returned before April 30, 1999 to the Research Institute of Industrial Economics. Form B: Details of the production affiliate abroad. Please read the instructions before filling in the questionnaire.

IUI code (to be filled in by IUI)

1. Name of the affiliate: DBNAMN

MBID

DBID

Country:

CC98

Parent company of the group:

Not Coded

2. (a) From what year has the affiliate been a production company of the group?

(b) Was the affiliate a sales company of the group before the year mentioned above?

(c) Did the affiliate operate as a production company of another group before the year mentioned above?

(d) Was the affiliate a state-owned company before the year mentioned above?

AAR

FRSF yes no

PRODF yes no

SOF yes no

China

Composition of sales of the affiliate

Composition of imports in the affiliate

The B-form: The Affiliate Level

B:2 MSEK 1998

2. (a) Total invoiced sales Sales should be stated net, i.e. after deductions for revenue tax, discounts and returns.

OMSDB

of which (b) goods made or assembled by the affiliate Make a reasonable estimate. The difference between 3a and 3b is made up of goods which are resold only, without being processed by the affiliate.

PRODDB

MSEK 1998

3. (a) Total invoiced exports Including exports to other companies in the group. Exports should be valued FOB.

EXPDB

of which (b) exports to Sweden

EXPDBSVE

of which (c) exports to Swedish companies of the group

EXPDBKF

MSEK 1998

4. (a) Imports of goods from Swedish companies of the group Make reasonable estimates.

IMPDBSVE

of which (b) goods for resale with no processing by the affiliate

IMPDBF

(c) goods for processing by the affiliate IMPDBINS

Accounting information

R&D

B:3 MSEK 1998

2. Capital expenditure Relates to gross investments in machinery, equipment and buildings.

INVDB

3. Expenditure on research and development (R&D) Excluding payments between group companies. R&D expenditure refers to both current expenses and depreciation of capital equipment for R&D. Both R&D carried out in-house and R&D commissioned by the affiliate from a third party should be included (as defined by Statistics Sweden, see instructions VIII:4).

FOUDB

MSEK 1998

4. Book value of fixed assets (planned residual value or net carrying value) Relates to machinery, equipment and buildings.

BKVDB

5. Total liabilities SKDB

6. Total equity EKDB

7. Total assets (book value) TILLGDB

Share 1998

Proportion of the equity stock owned directly and indirectly by the parent company of the group See instruction VIII:7.

AK1DB %

MSEK 1998

8. Operating income before depreciation RRDB

9. Income after interest and expenses RFIKDB

10. Net income NETDB

MSEK 1998

11. Total expenditure on wages and salaries (including fringe benefits)

See instructions VIII:5.

LONDB

Number 1998

12. (a) Number of employees Average number of employees during the year (full-time equivalent). See instructions VIII:2.

ANSTDB

of which (b) recruited from the Swedish companies of the group Make a reasonable estimate.

ANSTDBSV

4. Example: Globalization and MNEs

Local sales of affiliates (B-form)

Exports from affiliates (B-form)

Export- from Sweden (A-form)

China:Rest of the World (R):

Sweden

Affiliate

Affiliate

Germany

4. Globalization and MNEs

Local sales of affiliates (B-form)

Exports from affiliates (B-form)

Export- from Sweden (A-form)

China:Rest of the World (R):

Sweden

Affiliate

Affiliate

Examine the Examine the impact on FDI impact on FDI from :from :

Trade barriersTrade barriers GATT/WTOGATT/WTO Taxes/treatiesTaxes/treaties CorruptionCorruption Wage costs,Wage costs, Entry mode Entry mode and R&Dand R&D

(See (See References)References)

Germany

Does GATT/WTO affect trade and trade policy: Yes: since accession increases intra-firm trade!

1965 1970 19781974 19981986 1990 1994

50%

40%

30%

20%

10%

(i) Mean shareof affiliateproductionexported

Year

0%

Trend for countriesjoining the WTO pre-1965

Trend after accesionfor countries joiningthe WTO 1965-1998

Trend before accesionfor countries joiningthe WTO 1965-1998

x

x

x x

x

x

x

x

2.Globalisation!

Source: Norbäck, Urban and Westerberg (2007)

4. Entry mode and R&D

• Many governments seek to attract FDI!

• Governments sceptical towards foreign acquisitions of local firms and favor greenfield FDI

• Suppose that a government wants to encourage R&D in affiliates to MNEs:

• Should it restrict cross-border acquisitions?

1970 1978 1990 1994 1998

0.60

0.45

0.30

0.15

Merger and Acquisitions

Greenfield investment

(ii) Average probability of doing R&D

year

0

0

Acquired affiliates are more likely to do R&D than affiliates started from greenfield entry...

Source: Hakkala, Norbäckand Bertrand (2007)

...and acquired affiliates also have a higher R&D intensity than affiliates started from greenfield entry

1970 1978 1990 1994 1998

2

1

0.5

1.5

Mergers and Acquisitions

Greenfield investment

(i) Average R&D intensity (%)

(All observations)

year

0

Source: Hakkala, Norbäckand Bertrand (2007)

5. Should there be a new survey 2007/2008?

Decrease in the number of participating mother firms (MNEs):

(Hakkala and Zimmerman, 2005)

Table 4.1 Number of foreign affiliates and affiliate employees in survey MNEs.

Year

Parents answering

Questionnaire A

Affiliates

answering

Questionnaire B

Affiliate

employees

according to A**

Affiliate employees

according to B***

1974 108 480 290200 221111

1978 122 567 309030 227149

1986 108 646 363383 259823

1990 120 871 654167 440879

1994 132 1378 370257 531994

1998 118 703* 424850 223061

2003 62 1579* 456619 404268

Source: IUI database. Notes: *Includes observations from one MNE that reported data per country instead of per affiliate . **Total number of employees abroad as reported in A. ***Sum of employees in the reporting affiliates.

5. Why is there a fall in participating firms?

Foreign acquisitions of large Swedish MNEs

Volvo Cars, Pharmacia

Less peer pressure to answer the survey?

Too many questions? Too complicated?

• Compulsory survey?