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1. Foreign direct investments in 2015

This review examines the global development of foreign direct investments and Finland's investment flows, as well as the effect of these investments on Finland’s national economy in 2015. The different sections of the review raise factors that affect the interpretation of the figures and the scope of description of the statistics should also be considered when using the figures. The statistics on foreign direct investments mainly depict financial transactions between domestic and foreign units in multinational groups and the assets and liabilities these generate, as well as international corporate acquisitions. The statistics on foreign direct investments do not, in most cases, describe foreign real investments into Finland. If, for example, a domestic company under foreign control makes a factory expansion investment in Finland and does not receive financing for this directly from a foreign investor, nothing of the value of the factory expansion investment is recorded in the statistics on direct investments. More definitions of the concepts used in this review can be found in the statistics home page: http://tilastokeskus.fi/til/ssij/kas_en.html

1.1 Global FDI

According to the investment report published by the United Nations Conference on Trade and Development, flows of global FDI grew by 38 per cent in 2015 (UNCTAD: World Investment Report 2016). The growth in 2015 was mainly due to international corporate acquisitions and other cross-border company restructurings. Without the effect of major company restructuring, UNCTAD estimates the growth to be around 15 per cent.

In total, global foreign direct investments amounted to EUR 1,588 billion, of which EUR 868 billion were directed at developed countries and EUR 689 billion at emerging economies. Investments to developed countries increased by 84 per cent and investments to developing countries by nine per cent. In 2014, China was for the first time in history the largest host country of direct investments, but the United States reclaimed the top position in 2015. Of the investing countries, the United States was still the largest ahead of Japan and China. Among industries, investments related to primary production decreased while investments in the manufacturing and service sectors increased.

Figure 1. Global flows of direct investments in 2004 to 2015

In 2015, investments to the Member States of the European Union grew by 50 per cent from the previous year, but the growth was very unevenly divided between different countries. In addition to Finland, investments to 14 countries of the 28 EU Member States diminished from the year before, while clearly more was invested in Ireland, the Netherlands, Germany, France, Belgium and Luxembourg than in the year before. The biggest investors among EU countries were the Netherlands, Ireland and Germany. The appearance of Ireland, whose national economy is of Finland's size, as both a large host country of investments and an investor is an indication of the country's attractiveness in global arrangements of multinational enterprises.

UNCTAD's Report predicts the investment flows to diminish in 2016 by around 10 to 15 per cent, after which the flows are assumed to grow again in 2017 to 2018. The expected fall in investment flows in 2016 is partly caused by the flows of 2015 being clearly higher than the long-term average. On the other hand, the growth in direct investments is also weakened by the slowdown in the economic growth and total demand of some growing market areas, and by international and national measures to curb the tax arrangements of multinational enterprises.

Figure 2. Flows of FDI in 2004 to 2015

¹) Starting from 2013, the figures are not fully comparable with those for 2004 to 2012 due to changes in the international statistical standard.

1.2 Finland's inward FDI

After three successive years of downturn, the year 2015 was slightly stronger for Finland's economy. Gross domestic product made an upturn of 0.2 per cent even though the unemployment rate rose from 8.7 to 9.4 per cent. The external balance of the national economy also strengthened slightly. The current account was still in deficit but the deficit contracted from EUR 2.3 billion in 2014 to EUR 0.9 billion in 2015. The fall in the net international investment position that had continued since 2010 also halted. The net international investment position stood at EUR 1.3 billion positive at the end of 2015, having been EUR 5.4 billion negative in 2014.

Finland's inward FDI totalled EUR 1.3 billion on net, which is clearly less than in 2014, when the value of FDI was EUR 13.8 billion. The comparison year, 2014, was a record year and the high level of investments was then especially caused by corporate acquisitions where significant enterprises owned by Finns were either fully or partially transferred to foreign ownership.

Foreign direct investments are often interpreted too simply as real investments but this is not often the case according to a study published in 2014 (ETLA, Topias Leino and Jyrki Ali-Yrkkö: How does foreign direct investment measure real investment by foreign owned companies). Flow-through investments and enterprises' ownership changes do not often lead to real investments in the host country of the investment. On the other hand, if international enterprises operating in the country use domestic financing channels to finance their investments, this is not visible as a foreign direct investment. The heavy concentration of business activities also creates interpretation problems. Several small investments made into growth enterprises disappear into the normal intra-group financing solutions of multinational enterprises.

Despite the strong fall in direct investments in euros, Finland's attractiveness as a host country of investments does not seem to be weakening, as shown by the statistics published by Finpro. According to Finpro's statistics, 265 new internationally owned enterprises came to Finland in 2015 while the corresponding figure in 2014 was 229. The same statistics indicate that internationally owned enterprises already operating in Finland made over 230 decisions for expansions and further investments in their business in Finland in 2015.

At the end of 2015, the value of FDIs totalled EUR 74.2 billion, of which equity accounted for EUR 60.8 billion and the value of debt capital for EUR 13.4 billion. During 2015, the value of FDIs fell by EUR 1.6 billion. The fall in the investment stock is clearly visible in both equity and debt-based items and is mainly caused by changes in exchange rates and other valuation changes (see Table 1).

Table 1. Finland's inward FDI

	Total	Equity	Debt
Stock of investments 31 Dec 2014	75.8	61.6	14.1
Financial transactions	3.0	3.0	0.0
Re-invested earnings	-1.8	-1.8	0.0
Changes in the exchange rates	-0.5	0.0	-0.5
Other valuation adjustments	-2.3	-2.0	-0.2
Stock of investments 31 Dec 2015	74.2	60.8	13.4

Examined by country, direct investments have been made to Finland particularly from Sweden (50% of the investment stock), the Netherlands (18%), Denmark (6%) and Germany (5%). Examined by country group, investments to Finland mainly come from the EU area, whose combined share of the investment stock was 90 per cent in 2015. In 2015, the share of eurozone countries went down from 38 to 29 per cent, which was mainly caused by a heavy fall in investments from Luxembourg. The shares presented here were calculated by the immediate investor country. In fact, investments are often managed through an affiliate abroad, in which case the ultimate controlling investor is located in some other country. These figures calculated by the ultimate investing country are examined in more detail in Section 1.5 of this review.

Figure 3. Direct investments into Finland by the immediate investor country on 31 December 2015

Examined by industry, inward FDI is particularly directed within services to enterprises engaged in financing activities and information and communication activities. In manufacturing, most investments in euros have been made in chemical and metal industry enterprises. The industry of the investment is determined based on the industry of the domestic unit. Then, the share of financing activities is increased by arrangements where a Finnish manufacturing enterprise, for example, is managed from abroad through a domestic holding company classified in the financial sector and established for that purpose.

Finland's inward FDI generated returns of EUR 3.7 billion in total for foreign investors in 2015. Dividends paid for these investments amounted to EUR 4.8 billion and interests to EUR 0.6 billion, that is, in total clearly more than what investments produced in 2015. The difference was EUR 1.8 billion, which is recorded as a negative item in reinvested earnings paid from Finland to abroad and correspondingly, it reduces the inward FDI flow. Reinvested earnings describe the difference between the returns accrued and paid to owners in a given year. Negative reinvested earnings are produced in a situation where the profits/earnings generated in earlier years are distributed to owners in one year.

Returns generated by foreign investors relative to the value of investments decreased from the year before. In 2015, returns relative to the value of investments at the end of the year were 5.0 per cent, while in 2014, the rate of return was 6.3 per cent and in 2013 it was 6.5 per cent. Most returns in euros were generated by the biggest investor countries, that is, EUR 2.9 billion by Sweden and EUR 1.3 billion by the Netherlands. In turn, investments made from Luxembourg generated total losses of EUR 2.1 billion in 2015.

1.3 Finland's outward FDI

In 2015, outward FDI totalled EUR -11.4 billion on net. Thus, clearly less capital flowed outward than was returned as direct investments to Finland. Foreign equity investments without reinvested earnings totalled EUR 2.8 billion on net but a decrease in debt assets by EUR 14.2 billion turned the net flow of investments clearly into negative in 2015. The strong decrease in debt assets during 2015 was caused by reverse investments, which in this case means a growth in group account receivables and loans granted by foreign affiliates to their parent company.

Most outward capital flow was direct investments to Turkey and Norway. Most inward capital invested in direct investments was, in turn, from the Netherlands (EUR -10.8 billion) and Sweden (EUR -4.8 billion).

Table 2. Finland's outward FDI

	Total	Equity	Debt
Stock of investments 31 Dec 2014	96.1	93.1	2.9
Financial transactions	-11.4	2.8	-14.2
Re-invested earnings	-3.1	-3.1	0.0
Changes in the exchange rates	1.2	1.2	0.0
Other valuation adjustments	2.6	3.7	-1.0
Stock of investments 31 Dec 2015	85.4	97.7	-12.3

At the end of 2015, the value of outward FDI was EUR 85.4 billion, of which equity accounted for EUR 97.7 billion and the value of debt capital for EUR -12.3 billion. The value of the investment stock of direct investments decreased by EUR 10.7 billion during 2015, which is mainly explained by reverse investments. Holding gains or changes in exchange rates and other valuation changes increased the value of foreign assets by EUR 3.8 billion. The value change of objects owned abroad, which is based on changes in the market value of listed companies and the book value of unlisted targets, are recorded in other valuation changes (EUR 2.6 billion). Other valuation changes also include classification changes that are caused by a change in the investment type. For example, if the voting power entitling to ownership in a foreign investment object falls below ten per cent, the investment no longer fulfils the criteria of a direct investment and it is classified in the balance of payments either as a portfolio investment or other investment.

Examined by country, FDI from Finland is especially directed to Sweden (34% of the investment stock) and the Netherlands (15%). Examined by country group, investments are mainly directed to the EU area, whose combined share of the investment stock was 81 per cent at the end of 2015. The share of the countries belonging to the currency union was 41 per cent at the end of 2015. Significant direct investments outside the EU are found in the United States (EUR 7.6 billion), Turkey (EUR 2.6 billion) and Russia (EUR 2.1 billion). The value of Russian investments decreased by EUR 0.1 billion from the year before.

The shares above were calculated according to the country of the immediate investment target, in which case the appeal of the Asian rising economies is very small. For example, the value of investments to China was EUR -0.3 billion at the end of 2015, while according to the statistics on Finnish affiliates abroad, there were 223 affiliates of Finnish enterprises in China in 2014 and their share of the turnover generated abroad was 7.7 per cent. There are no data available on outward FDI according to the country of the ultimate investment target, so it is not possible to give a more exact specification of the final investment target. However, most of the investments to the Benelux countries are connected to the management of a global enterprise or its part and the actual production activity is located in some other country - e.g. elsewhere in Europe or Asia.

Figure 4. Finland's outward FDI by immediate host country on 31 December 2015

Examined by industry, enterprises having made foreign direct investments mainly represent the metal and paper industries and services. At the end of 2015, the value of foreign investments by metal industry enterprises was in total EUR 16.6 billion, of which EUR 5.5 billion was directed to the United States, EUR 4.1 billion to the Netherlands and EUR 3.3 billion to Sweden. The value of service enterprises' foreign investments was EUR 33.8 billion at the end of 2015. These investments were centred strongly in Sweden (EUR 16.4 billion) and the Netherlands (EUR 8.6 billion).

Outward FDI generated returns of EUR 6.7 billion in total for Finland in 2015, which is EUR 1.5 billion less than in 2014. Dividends from these investments amounted to EUR 9.5 billion and interests to EUR 0.4 billion. As a result of decreased income and a smaller investment portfolio, returns gained by Finland relative to the value of FDI remained nearly on level with the previous year. In 2015, the rate of return was 7.9 per cent, having been 8.6 per cent in 2014. Finland gained most returns in euros from Sweden (EUR 2.8 billion) and the Netherlands (EUR 1.6 billion). In turn, investments made to the United States generated a total loss of EUR 0.3 billion in 2015.

1.4 Direct investments in the balance of payments

At the end of 2015, the value of Finland's inward FDI was EUR 74.2 billion and that of outward FDI was EUR 85.4 billion. Thus, Finland still has more assets than liabilities from direct investments even though, as a result of a decline in the value of investments directed abroad in 2015, international direct investment assets on net halved to EUR 11.2 billion from EUR 20.3 billion in 2014. Direct investments improve, in particular, the net international investment position of the business sector, which stood at EUR 20.1 billion at the end of 2015. The liabilities of financial and insurance corporations related to direct investments exceeded, in turn, the assets by EUR 10.5 billion. The net international position connected to direct investments is the same in the statistics on balance of payments and international investment position, although the gross figures of balance of payments differ from the figures presented here according to the directional principle (The differing statistical method of balance of payments is discussed more in Section 2.2 of the review for the statistical reference year 2013).

Figure 5. Foreign direct investments in 2004 to 2015

¹) Starting from 2013, the figures are not fully comparable with those for 2004 to 2012 due to changes in the international statistical standard.

In 2015, returns on inward FDI amounted in total to EUR 6.7 billion and on outward FDI to EUR 3.7 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 +3.0 billion in 2015. From the viewpoint of Finland's current account, returns on direct investments were also the only type of investment in surplus. The net effect of returns from portfolio investment on the current account was EUR -1.9 billion and that of other investments EUR -0.9 billion.

Figure 6 shows that returns connected to direct investments have improved Finland's current account throughout the reference period 2004 to 2015. Annual returns gained by Finland have varied between EUR 5.2 and 8.5 billion and these investments have yearly produced a surplus of EUR 1.2 to 4.3 billion.

Figure 6. Returns on FDI in 2004 to 2015

¹) Starting from 2013, the figures are not fully comparable with those for 2004 to 2012 due to changes in the international statistical standard.

1.5 Investments according to the ultimate investing country

FDI statistics have conventionally been compiled only on the basis of the immediate investor country. The new statistical standards and data collected on a more detailed level than before enable country-specific analyses of direct investments also by the ultimate investing country starting from 2013. The ultimate direct investor here refers to the one that is topmost in the ownership chain of the foreign direct investor. The ultimate direct investor is not controlled by any other unit and it can also be a domestic unit.

Figure 7 shows that direct investments to Finland have been made clearly more from Sweden and the Netherlands if investments are viewed according to the immediate investor country. This indicates that these investments are managed through an enterprise located in these countries, although the actual investor is elsewhere. The case is opposite for the United States. In 2015, the stock of investments to Finland from the United States was four times larger when viewed on the basis of the ultimate investing country (EUR 5.2 billion) than on the basis of the immediate investor country (EUR 1.4 billion). This means that a clearly larger share of FDI into Finland is managed in the USA than made immediately into Finland. Investments from Canada, Japan, France and Russia are also larger if they are viewed on the basis of the ultimate investing country. Examined by the ultimate direct investor, the share of Finland is also significant. This is because domestic enterprises own domestic affiliates through their foreign affiliates.

Figure 7. Foreign direct investments to Finland in 2015, investment stock

1.6 Finland's outward FDI by ultimate controlling parent

It is not possible to compile statistics on Finland's outward FDI by ultimate host country with the help of available data sources. However, by researching the ownership chain of enterprises that have made foreign investments from Finland we can examine what proportion of Finland's outward FDI has been made by enterprises that are under Finnish control. The limitation of such an examination is also that it covers only the ownership chain of units in corporate form. For example, the true owners of a parent company registered in Luxembourg can be Finnish private citizens.

In 2015, the value of Finland's outward FDI was EUR 85.4 billion, of which 84 per cent were held by enterprises under Finnish control. The most considerable ultimate investing countries outside Finland were Sweden and Luxembourg (see Figure 8).

Figure 8. Finland's outward FDI by country of ultimate controlling parent in 2015

Source: Foreign direct investments 2015, Statistics Finland

Inquiries: Kristian Taskinen 029 551 2238, balanceofpayments@stat.fi

Director in charge: Ville Vertanen

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Updated 27.10.2016