The Finnish Mystery: Why So Little FDI?
By Eva Rytter Sunesen
Finland outperforms the rest of the EU when it comes to having an attractive climate for Foreign Direct Investment (FDI). So far, Finland hasn’t been able to transform the favourable policy framework into significant FDI inflows. Finland thus foregoes much needed capital, jobs, and knowledge.
Finland has a very attractive policy framework for attracting FDI
In a new report prepared for the European Commission, Copenhagen Economics has ranked the relative FDI attractiveness of all 28 EU Member States and 16 non-EU countries in 2014 and 2009 based on an index covering 18 policy relevant indicators. The report should be seen in the context of the recent drop in the EU share of global FDI, which is a concern to policy makers because FDI brings capital, jobs, and knowledge to the EU.
Finland comes out as the highest ranked EU Member State and the 3rd most attractive country overall, only outperformed by Hong Kong and Switzerland. Finland ranks very highly in terms of most indicators associated with the political, regulatory and legal environment, and its knowledge and innovation capacity. Finland thus outperforms most other countries in terms of having a stable and transparent political and regulatory environment, a high quality educational system, a strong focus on R&D, and a high level of university-industry collaboration.
Nevertheless, Finland is not getting the FDI it could. Relative to its economic size, the stock of FDI in Finland is thus at par with the EU average.
Greenfield investments, which take place when a new foreign company establishes itself in the country or expands its current operations, are especially lagging behind. As a share of all FDI inflows received over the period 2003-2014, greenfield investments only make up 19 per cent in Finland, compared to an EU average of 25 per cent.
As greenfield investments expand the capital stock in the economy and help generate new jobs, the relatively poor performance of Finland in terms of attracting this type of investment should be a concern to Finnish policy makers.
Why so little FDI?
Given the good policy environment in place, it is somewhat of a mystery why Finland does not attract more FDI in general and greenfield investments in particular.
A closer look at the Finnish policy framework for attracting FDI, may however help shine some light on this mystery. Despite Finland’s overall good performance, there are areas in which Finland does less well in comparison with other countries. This includes the quality of the physical and logistical infrastructure, where Finland has lost momentum since 2009, as other countries have improved faster in this area. Another example is broadband coverage and speed, where Finland has improved its performance and risen slightly in the ranking over time, but is still outperformed on at least one of the measures by countries such as e.g. South Korea, Japan, Switzerland and the Netherlands.
Cost competitiveness is the area in which Finland ranks the lowest. While recent cuts in corporate tax rates have helped improve this, Finnish wages continue to be among the highest in the EU.
In order to help increase FDI to Finland, it is thus important that Finland does not lose momentum but keeps up with the pace of improvements in other countries.
By Eva Rytter Sunesen
Eva Rytter Sunesen (PhD in Economics) heads the Trade & International Market service at Copenhagen Economics. Eva is specialized in international economics and focuses particularly on issues related to international trade and Foreign Direct Investments (FDI). She is currently carrying out a study on trends in regional FDI flows across Europe and the impacts on the regional economies. The study is commissioned by ESPON and will provide recommendations that could support regions and cities in their positioning and strategies towards attracting FDI. Write to Eva at email@example.com or call her at +45 2333 1833.
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