Corporate acquisitions and reinvested earnings increased direct investments in 2021

Capital flows caused by a lively year of corporate acquisitions

Of inward FDI flows, equity investments covered EUR 8.2 billion and debt-based investments EUR 0.7 billion. Due to the rounding difference, the figures do not sum up exactly to the net figure, EUR 9.0 billion. Corporate acquisitions during the year explain more than two-thirds of the total flow. Examined by country, net inward FDI flow was highest from Luxembourg (EUR 2.9 billion), Sweden (EUR 2.4 billion) and Switzerland (EUR 1.5 billion).

In this review, the term “flow” refers to the variable “Transactions excl. reinvested earnings” found in the database tables of the statistics.

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When examining the figures, it should be borne in mind that the location country of the first foreign target in the chain of ownership is visible as the counterparty country. For example, U.S. investors often manage their Finnish holdings through some European financial centre. Thus, corporate acquisitions made by U.S. enterprises, for example, are not necessarily visible in the statistics as capital flows from the United States to Finland. The FDI review for 2020 examines in more detail the country distribution of inward FDI according to the immediate and ultimate investor.

Outward FDI totalled EUR 1.9 billion, of which equity-based financing accounted for EUR 4.9 billion and debt-based for EUR -3.0 billion. A negative sign can be interpreted as meaning that Finnish investors borrowed more from their foreign affiliates than they lent them during the year, that is, liabilities grew more than assets. Most capital flowed on net from Finland to Ireland (EUR 2.2 billion), Uruguay (EUR 1.1 billion) and the United Kingdom (EUR 0.7 billion).

There was no single dominant factor behind the positive net equity flow, as the flow comprised not only real investments but also corporate acquisitions and intra-group equity management. At least for the time being, the published statistics do not itemise flows by type (corporate acquisitions, greenfield investments, extension of capacity) and Statistics Finland cannot comment on the levels of flow types in more detail than this to protect the data of its individual data suppliers.

To simplify strongly, equity flows are more often related to corporate acquisitions or real investments than debt-based flows. Debt-based flows of financial instruments, in turn, are often linked to capitalisation arrangements within multinational large corporations. However, the interpretation is not generally applicable. For example, a foreign corporate buyer may set up a new company in Finland, which it finances with debt-based financing, which the company established in Finland then uses to carry out the actual corporate acquisition. Similarly, the internal arrangements of multinational groups may generate significant equity flows which, however, cannot be considered to be of greater real economic significance.

Investment stocks from abroad to Finland and from Finland abroad grew

The value of the stock of inward FDI grew by EUR 2.5 billion during 2021 and was EUR 76.2 billion at the end of the year. Of this, the value of equity investments was EUR 64.4 billion and that of debt-based capital EUR 11.8 billion. Examined by country, most investments were directed to Finland from Sweden (EUR 22.9 billion), the Netherlands (EUR 11.7 billion) and Luxembourg (EUR 9.9 billion).

The moderate growth in the value of the investment stock relative to capital flows is largely explained by the fact that in corporate acquisitions, the total realised transaction price is recorded as flows, but the book value of the equity of the acquired company is used as the closing stock for the statistical reference year. This ensures internal consistency of the data because all other non-listed companies are also valued in the statistics at the book value of their equity. The difference between the flow and stock data collected over a certain period is visible in the statistics as other changes in positions.

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At the end of 2021, the investment stock from Finland abroad totalled EUR 125.0 billion, of which equity investments accounted for EUR 128.3 billion and the value of debt-based capital for EUR -3.3 billion. A negative sign of debt assets means that Finnish companies' liabilities to foreign subsidiaries exceeded the value of assets. Measured by the value of the investment stock, the biggest counterparty countries were Sweden (EUR 28.5 billion), the Netherlands (EUR 21.5 billion) and Ireland (EUR 17.8 billion).

The investment stock grew by EUR 7.2 billion during the year, which is mainly explained by the high level of reinvested earnings, EUR 6.1 billion. The statistical term “reinvested earnings” describes the share of the combined returns of direct investment enterprises that is not paid as dividends to direct investors.

Returns on investments record high

During 2021, Finnish investors’ returns from foreign direct investments (FDI) totalled EUR 14.0 billion. Of total returns, dividends paid to Finland amounted to EUR 7.6 billion and interests to EUR 0.3 billion. The share of reinvested earnings was EUR 6.1 billion. Examined by country, Finnish investors generated most returns on their investments in companies in Sweden (EUR 5.4 billion), the Netherlands (EUR 1.6 billion) and Denmark (EUR 1.4 billion).

When interpreting the data of the statistics it should be borne in mind that in the data according to the immediate target or investor country, the location country of the first foreign company in the chain of ownership is visible as the counterparty country. For example, if a Finnish company has a subsidiary in the Netherlands and it has subsidiaries around the world, the combined returns of all these companies are visible in the statistics for the Netherlands.

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Returns generated by foreign owners on direct investments to Finland totalled EUR 8.7 billion. Dividends paid abroad amounted to EUR 5.5 billion and interests to EUR 0.5 billion. The share of reinvested earnings was EUR 2.7 billion. Examined by country, most returns from Finland were generated by investors from Sweden (EUR 3.4 billion), the Netherlands (EUR 1.5 billion) and Luxembourg (EUR 1.0 billion).

This property income is recorded in the primary income item of Finland's current account and its net effect on Finland's current account was EUR 5.3 billion in 2021. Net returns dropped slightly from the previous year's EUR 5.8 billion but stayed on a historically high level. Although both the returns of foreign investors from Finland and those of Finnish investors from abroad grew clearly, the net decreased because the former grew more than the latter. Relative to the value of the investment stock, returns were high: investments from abroad to Finland generated 11.4 per cent and investments from Finland abroad 11.2 per cent.

When examining the return figures, it should be borne in mind that the returns generated for “Finnish investors” are not equal to those generated for Finland or Finns. For example, relatively few Finnish listed companies have foreign owners with more than 10 per cent ownership, whereby the returns made by their foreign affiliates appear to remain in Finland in full if only the statistics on direct investments are examined. However, it is clear from Euroclear’s ownership statistics that many of Finland’s big listed companies have a fairly international ownership base. A majority of the returns on direct investments accrued to “Finnish investors” flows as returns from portfolio investments back abroad. In balance of payments, portfolio investments are foreign investments in which the holding or voting power remains below 10 per cent after the investment.

In database table 12gu, dividends, interests and reinvested earnings are bundled under the same variable. Section 1.3 of the FDI review for 2020 has a calculation formula that helps those interested in the country-specific levels of dividends, interests or reinvested earnings calculate them themselves.