Finnish labour-intensive manufacturers expand into new Member States

Source: Confederation of Finnish Industry and Employers.

A sectoral breakdown of Finnish industry’s investments in the new EU Member States between 1998 and 2002 shows that firms in the technology sector and the textiles and clothing industry invested most in the region, representing 23% and 20% respectively of all Finnish investments. Companies in the former sector expanded mainly in Hungary, where a major electrical industry cluster has developed, while firms in the latter sector invested exclusively in Estonia. The food industry’s investments (13% of the total) went mainly to the three Baltic states. This is an indication of the importance of proximity to the Finnish market in this sector. The wood industry’s investments (13%) were spread rather evenly between Poland, the Czech Republic and Hungary. The building materials industry (11%) invested mainly in Poland and the chemicals industry (11%) in Latvia, Poland and Hungary.

Labour-intensive manufacturing

As shown in the table above, the new EU Member States’ share of Finnish cumulative foreign industrial investment between 1998 and 2002 was only 3.6%, while their share of Finnish industrial firms' overseas employment was almost 10% in 2002. The industrial activity of Finnish companies in these countries is therefore clearly very labour-intensive in nature. Of course, this comparison does not take into account any major investments that were made prior to 1998. Nevertheless, given that large-scale expansion took place in the region during the period considered and only about a third of the average amount of capital was needed to produce it, such a conclusion can be drawn.

A further indication of the central importance of labour for Finnish industrial firms's operations in the new EU Member States is that as many as about 80% of their employees in those countries were involved in production in 2002, while the role of research and development (R&D) was negligible; only in Hungary were significant numbers of of R&D personnel employed. Meanwhile, the proportion of workers taking part in production in Finland fell to about 70% and the share of R&D personnel rose to 11% in 2002. In the light of these figures, the qualified viewpoint of TT, expressed in a report presenting the survey findings, is that production in the new EU Member States and R&D in Finland have supported one another. This has been possible due to the geographical proximity of the countries. In the case of more distant markets such as China, R&D has followed production abroad but in the case of the eastern European countries this has not taken place. Thus, shifting production to the new EU Member States can, the TT report suggests: first, increase the productivity of Finnish firms’ domestic labour force; and, second, further boost the competitiveness of firms through the use of cheap foreign labour. The surveyed firms’ total wage bill divided by the number of employees was almost three-quarters lower in the new EU Member States than in Finland in 2002.

Social partners have mixed views

Not only wages but also taxes are significantly lower in the new EU countries than in Finland. According to TT, one of the most notable effects of EU enlargement in Finland will be the friction caused by this imbalance, because pressure is likely to grow to decrease Finnish taxes. This is something that TT would like to see happen. At the same time, this is one of the main causes for anxiety that Finnish trade unions have had over EU enlargement (FI0202103F). They have feared that tax competition may ultimately lead to the erosion of Finland's welfare state.

Tax cuts have already been made in Finland. Most recently, at the end of June 2004, parliament passed a bill to reduce the corporate income tax rate from 29% to 26% and the tax rate on capital income from 29% to 28%. The government’s explicit aim in introducing the relevant bill was to make Finnish corporate taxation more competitive internationally. Income taxes have also been lowered by 5%-6% in all income brackets since 1996, and further cuts are very likely to be forthcoming. Despite trade union concerns over the adequacy of welfare state funding, both employers and trade unions have supported tax cuts as a means to boost employment (FI0212105F). Furthermore, TT has pointed to the fact that, despite reductions in taxation in recent years, government finances have remained sound. In fact, the state budget currently shows a relatively large surplus. The long-term effects of the tax cuts may prove to be more mixed, however.

EU enlargement on the whole has largely been welcomed by trade unions in Finland. The position of the Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK), for example, is that it is a politically and economically essential project that will increase stability in Europe. SAK's main concerns over the enlargement process lie in the differences between Finland and the new EU Member States, not only in terms of taxation levels but also in levels of union organisation, wages and labour standards. For this reason it, along with the other Finnish trade union confederations, successfully demanded the imposition of a two-year transitional period for the free movement of labour to Finland from the new EU Member States. As the standards rise in those countries in the coming years, SAK has no problem with lifting the barriers to the free movement of labour. Neither has it demanded protectionist policies to stop the decline of industrial employment in Finland. Essentially its position is that the competitiveness of Finnish firms is the only long-term guarantee of keeping jobs in Finland. Thus it is also willing to accept that some jobs will go abroad.

Commentary

The combination of low labour costs and proximity to the Finnish and other European markets has made EU enlargement a major opportunity for Finnish businesses. It may prove especially beneficial for domestic manufacturing firms for which closeness to Finland is essential, and which still do most of their low-skilled production domestically. The food industry, for example, is likely to shift ever more production to the Baltic states in the coming years. This will contribute to the declining trend in industrial employment in Finland that has been taking place since the 1970s. The share of industrial production in GDP is, nevertheless, still higher in Finland than in most developed countries. Therefore, it is especially vulnerable to the shifting of production to low-cost countries. This is a major challenge for blue-collar workers' trade unions because the loss of employment and the increased mobility of firms may easily lessen their political power vis-à-vis employers. To counteract this trend, it will be essential for unions too to move strongly into the international arena. (Aleksi Kuusisto, Labour Institute for Economic Research)