Finnish firms' foreign investment and employment abroad examined

Source: Confederation of Finnish Industry and Employers.

The study shows that the investment are increasingly being made in the emerging markets, although most of the flows still go to the 'old' industrialised countries. China has become the centre for Finnish companies in Asia and Brazil has the same role in South America. Russia seems to be important especially for those Finnish companies for which Asian markets are too far away. It is estimated by TT that FDI will grow especially in Taiwan, China, Russia and India. Investments in these countries are estimated to double in the next five years, reaching EUR 11.5 billion. China is expected to account for nearly EUR 6 billion of this.

Nowadays, a majority of Finnish-based companies' employees in foreign countries work in production and research and development. A few years ago, most of them worked in sales, marketing or services. Tight personal taxation in Finland, distance from financial markets and the strong growth of subsidiaries abroad are cited as key reasons for moving functions to other countries (FI0209105N). However, the TT study also emphasises the market-related motives for the foreign investment. Although the difference in labour costs and taxation is an important factor, the main reason is still the nearness of large, growing markets. Investments have been used to establish a presence close to the customers and to obtain growth opportunities. The study also emphasises that companies that have expanded abroad are among those which have not cut jobs in Finland. Internationalised companies seem to be better employers at home than companies which operate in Finland only.

Company tax reform

The Finnish government announced in mid-November 2003 that is has agreed on a company tax reform, which is planned to be implemented at the beginning of 2005. The official explanation for the reform is the need to ensure the international competitiveness of the Finnish tax system (FI0212105F and FI0209105N). The corporate income tax rate will be reduced by 3 percentage points to 26%. The capital gains tax rate will be reduced by 1 percentage point to 28%. Both corporate profits and capital gains are currently taxed at a rate of 29%, which is already below the Organisation for Economic Cooperation and Development (OECD) average (30.8%) but higher than in Estonia, for instance. In Estonia the corporate taxation rate is zero while income tax is 26% for all, whereas in Finland it is an average of 33%, with the highest rate being 60%.

Under the current system, the Finnish shareholders of Finnish listed corporations have paid no taxes on their dividend income. The 'avoir' fiscal system (ie an 'imputation' system of corporation tax) will be abandoned in the reform and partial double taxation of dividends will be introduced. Listed and non-listed companies will be treated differently. The owners of small businesses will still be able to draw a certain amount of dividends tax-free, similar to the current practice. This tax-free allocation will be equal to 9% of a company's net assets. If more dividends are paid, 70% of the extra payment will be taxed at the income tax rate applying to the owner. For each taxpayer, the maximum annual amount of tax-exempt dividends will be EUR 90,000, while 70% of dividends exceeding this limit will be taxed as capital income for the beneficiary. This EUR 90,000 limit is considered much too low by entrepreneurs. Tax surpluses for the tax year, which are unused at the entry into force of the reform, will not be credited. Cumulative taxation of dividends received by corporations will be eliminated. The rate of capital tax will be reduced to 0.8% and the minimum value of taxable capital will be increased to EUR 250.000.

Many company representatives are disappointed by the reform, though it has been estimated that eight companies out of 10 will witness a reduction in their taxes. Companies wanted the corporate tax rate to be cut further to 25%, as proposed by a working group that prepared the reform. Income tax rates are not changed by the reform.

Commentary

It seems that internationalisation of Finnish firms is growing very rapidly and seems unavoidable. China especially provides huge growing markets together with very cheap labour, making it impossible for a country like Finland to compete with it. The Salcomp example shows that certain kinds of production just do not pay any more in Europe.

It is time to think about the future role of Finland in the global division of labour. So far research and development has stayed in Finland while production has been moving to cheaper countries. It is mainly low-skilled jobs that have moved so far, but there is increasing competition even for demanding jobs from the developing countries. Even this might be changing, as many developing countries nowadays have a high educated labour force to offer.

The number of industrial jobs has decreased in Finland during the last few years. There are different views on the effects of foreign direct investment on domestic employment. It is hard to say whether the jobs created abroad have been substituting jobs at home or what would have happened without FDI. The survey conducted by TT reveals that corporate taxation has not been the problem for Finnish firms, but rather personal income taxation, which has made labour costs high. In that sense, the recent decision to lower corporate taxation and leave income taxation at its current level raises discussion. The fact that capital is more mobile than labour makes it easier to keep labour income taxation high at same time when corporate taxation has to adjust to the international competition. (Seija Parviainen, Labour Institute for Economic Research)