Report: Productivity Effects of Foreign Acquisitions in Sweden – a sectoral analysis

Productivity rises by 10 per cent in companies that become foreign owned.

Patrik Karpaty Trade Policy Adviser

Patrik Karpaty.jpg

Companies that are bought up by foreign owners increase their productivity. The greatest increase in productivity is seen in very small companies in the service sector. This is shown by an economic analysis carried out by Kommerskollegium before Sweden introduces a mechanism to review foreign direct investments.

Patrik Karpaty, what is this report about?

I have researched what happens to Swedish companies when they become foreign owned. More specifically, I examine whether the acquisition affects productivity. From next year, Sweden, like other EU countries, will review foreign investments in Swedish companies, especially those whose activities are worthy of protection and important to society. In this report, we therefore looked at industries engaged in food supply, critical infrastructure, critical technology and critical inputs – industries that could fall within the scope of the new legislation.

What were your findings?

The economic analysis shows that productivity rises on average by around 10 per cent in companies that become foreign owned. This is especially the case for acquisitions of very small companies, micro-companies with 1–10 employees, in the service sector. For these small companies, access to foreign capital, technology and international networks is particularly important for them to be able to develop. If you compare sensitive to non-sensitive industries, the positive effects are even stronger in the sensitive industries in particular.

How should these results be interpreted?

Foreign investments are important for Sweden, as they provide access to new markets, new technology and financing, which is especially key for small companies. This is reflected in increased productivity in companies that become foreign owned, regardless of whether the acquisitions take place in sensitive industries such as food supply or healthcare, etc. This means that we need to take into account the financial aspect and the risk that the review mechanism will lead to many investments being redirected to other countries, or never being made at all. Since we found the greatest positive effects in Sweden’s very small companies, it is vital that this process does not become too burdensome for them. They may need some kind of extra support in complying with the new legislation.

But shouldn’t security be more important than productivity?

Security is important, but there also needs to be a reasonable balance between lost benefits from missed investments and the security risks that may follow from investments. In some cases, security aspects must be put first, before economic effects. In other cases, the security risk may be small, but the financial gains when the company gets a foreign owner are very large.

Why is this important?

It is important that the review mechanism in Sweden is not perceived as being tougher than that in other countries. It could lead to us losing competitiveness in Sweden, or to other countries paying Sweden back with the same coin and making our investments there more difficult. Multinational companies with operations in several countries contribute to the spread of technology and knowledge. They create employment and fuel economic development. This is true of outgoing Swedish investments as well as foreign companies’ investments in Sweden.

International trade and investments are particularly important for a small open economy like Sweden. For a long time now, Sweden and most developed countries have also been undergoing a transformation from the manufacturing industry towards more knowledge-intensive production in the service sector. More knowledge is needed both in Sweden and internationally about how foreign investments affect companies in the service sector. I hope that this report contributes to building knowledge about the importance of foreign investment for small service companies and investments in sensitive industries alike.