Finnish companies in the world — did capital deliver returns? The profitability of Finnish companies’ foreign units in 1994–2004

Abstract

This report examines the profitability of Finnish companies’ foreign subsidiaries, comparing it with the returns from business operations conducted domestically during the years 1994–2004. The profitability of foreign units as a whole has been weaker than the profitability of domestic business operations. This situation has persisted throughout the entire 25-year history of Finnish companies’ international expansion.

The reason for the productivity differential may lie in the excessive prices paid when acquiring foreign companies. Overpayments for foreign targets totalled approximately 16 billion euros. The report examines, on a company-by-company basis, the largest Finnish corporate acquisitions in which the target was a foreign company. In these acquisitions, overpayments amounted to 7 billion euros. When return expectations were not met, the overpayments were written off as expenses. This sum is readily comparable to the costs caused by the banking crisis of the early 1990s. It cannot be regarded merely as losses for the companies or their shareholders. It represented lost national income, and the foregone tax revenues amounted to two billion euros.

Large overpayments and, in several cases, failed major acquisitions alone are not sufficient to explain the profitability differential, however. Reasons may be sought in the profit shifting practised by corporate groups between different countries in the manner most advantageous from the perspective of taxation and profit distribution. If the return differential is due to profit shifting, this suggests that Finland has fared well in tax competition. The extent of profit shifting cannot be reliably estimated.

The reason may also lie in differences in operating conditions. In Finland, the profitability of both industrial and commercial companies is better than in key competitor countries, so it would be surprising if Finnish companies’ foreign units had performed better than their domestic operations.

There is considerable sectoral variation in the rate of return of foreign units. The performance of the forest industry has been weak. In the metal industry, foreign units may have performed better than domestic operations, if company-specific variation is taken into account. The average return on the sector’s foreign operations is reduced by Nokia’s large liquid investments in international capital markets. The poor rate of return in service sectors is substantially affected by unsuccessful investments in the telecommunications sector. In the chemical industry and other manufacturing, the rate of return of foreign units is at the level of domestic units or slightly better.

The motives for outward foreign direct investment are justifiably to be sought elsewhere than in the pursuit of immediately higher returns. The reasons are strategic — they seek proximity to growing markets and market power. (AI translation)

• ISSN: 1795-2832
• ISBN: 978-952-209-049-2
• Press Release in Finnish
• Publication in PDF-format