FINLAND TRADE AND INVESTMENT STATISTICAL NOTE

International trade, foreign direct investment and global value chains FINLAND TRADE AND INVESTMENT STATISTICAL NOTE 217 International trade and foreign direct investment (FDI) are the main defining features and key drivers of global value chains (GVCs). However, despite their strong complementarities, the two flows are typically presented and treated separately in the statistical information system. Drawing on new and improved measures of trade and investment, this country note provides relevant statistical information from OECD databases on trade, investment, the activities of multinational enterprises (MNEs) and global value chains (TiVA). It sheds new light on the trade-investment nexus by highlighting the interrelationships between trade and FDI, their economic impact in the context of GVCs, and the role of MNEs as the main directors of these flows. The data are as of 1 May 217. More information and country notes are available at www.oecd.org/investment/tradeinvestment-gvc.htm. The Finnish economy is not as export orientated as other similarly sized OECD economies (exports contributed 28% of GDP in 214), and inward investment is lower than Finnish investment overseas. However, foreign-owned firms are twice as export intensive as domestic Finnish firms, and the economy as a whole has a high import content in exports reflecting GVC integration. Finland s investment overseas offers another channel to participate in GVCs. The strength of Finnish MNEs is illustrated once a broader notion of international orientation, capturing both trade and investment, is used. This broader view captures the impact on national income of both exports and sales through foreign affiliates and suggests Finland has a higher international orientation than trade data alone indicate because it is a net outward investor (the broader measure is equivalent to 3 GDP) Looking at trade in value added rather than gross values illustrates that the United States and Germany are Finland's most important export and import partners respectively. Considering both trade and investment can shed new light on Finland s partner countries; for example, the United Kingdom and France both serve the Finnish market through trade and investment, while China, India and Italy do so mainly through trade. The United States supplies Finland mainly through sales by foreign affiliates, and moves ahead of many countries once trade and investment are combined. The top manufacturing exporting industries in Finland are machinery and equipment (MEQ), pulp and paper products (PAP) and basic metals (MET). In each of these top exporting industries, the majority of exports are by domestic MNEs, reflecting the strength of domestic industry. Apart from the pulp and paper products industry, these industries have a high import content of exports, an indicator of GVC integration. OECD 217 www.oecd.org/investment/trade-investment-gvc.htm

Growth Rates Trade and investment in Finland Growth in trade had recovered after the global crisis, but has since slowed Like many economies, Finnish trade contracted significantly at the height of the global crisis, but has also struggled to regain pre-crisis rates. Having outpaced OECD growth in trade for the pre-crisis years, Finnish trade contracted more severely than the OECD on aggregate in 29. In 215 and 216, Finnish growth in exports was positive, although only marginally so in 216 at.5%. It is likely that trade sanctions on Russia by the international community have had an effect on Finnish trade in recent years. 15 1 5-5 -1-15 -2-25 Figure 1. Growth rates of trade and GDP for the OECD and Finland, 21-216 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 Finland GDP OECD GDP Finland Exports OECD Exports Finland Imports OECD Imports Source: OECD SNA Gross exports amounted to USD 83 billion in 216 (41% of GDP), and gross imports to USD 87 billion (42% of GDP). Gross trade figures, however, overstate the real contribution of trade to the economy. In value-added terms, exports contributed 28% of total GDP in 214, below the 32% recorded in 21 and 28, and also below the OECD median. The contribution of direct and indirect imports to domestic final demand measured 29% in 214, below the 212 high. 35% 3 25% 2 15% 1 5% Figure 2. Trade in value added terms, imports and exports, 21-214 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Imports (Foreign value added in domestic final demand) Exports (Domestic value added in foreign final demand) OECD Exports (Domestic value added in foreign final demand- median) Source: OECD-WTO Trade in Value Added Data Investment is more outward than inward, but the gap is narrowing Outward FDI has decreased since 212 (this is due to negative valuation adjustments as well as divestment by Finnish investors) while inward investment has remained broadly stable. In 215, outward stock was equivalent to 4 of GDP while inward was 35% of GDP. Despite the reduced growth in outward FDI stock as a share of GDP, FDI remains more outward orientated in Finland (Figure 3). In 215, Finland s 2

% GDP % GDP share of the OECD total outward and inward FDI stock (.48%,.49%) was slightly above its share of GDP (.45 %) (Figure 4). Figure 3. FDI stocks and income as a share of GDP 7 5% 6 4% 5 4 3% 3 2% 2 1 1% 28 29 21 211 Outward FDI Stock 212 213 214 215 Inward FDI stock Income payments (RHS) Income receipts (RHS) Source: OECD FDI Statistics (BMD4) Figure 4. FDI stocks and GDP as a share of OECD total, 215.6%.5%.4%.3%.2%.1%. GDP Inward Outward Source: OECD FDI Statistics (BMD4) Foreign-owned firms directly sustained 16% of jobs in the private sector in 213. Reflecting the relatively low level of inward investment compared to other similar OECD economies, foreign-owned enterprises accounted for 16% of jobs in the private sector in 213 and 21% of private sector value added produced in Finland, excluding the agriculture and finance sectors. and foreign owned firms are more export intensive than domestically owned firms On average, foreign-owned firms in Finland are twice as export intensive (share of exports in turnover) as domestically owned firms. The import intensity of foreign-owned firms (share of imports in purchases) is also significantly higher for foreign-owned than domestic firms. Finnish domestic firms are more export and import intensive than the OECD median, and the foreignowned firms in Finland are close to the OECD median for export intensity. Domestic MNEs provide important channels to penetrate foreign markets via affiliates Figure 5. Export and import intensity of domestic and foreign-owned enterprises 4 35% 3 25% 2 15% 1 5% Finland OECD Finland OECD Median Median Export Intensity Domestic-owned firms Import Intensity Foreign-owned firms Source: OECD AMNE and Trade by Enterprise Characteristics (TEC) statistics (211) In 215, Finland received USD 7 billion in income receipts from its outward investment, equivalent to approximately 3% of GDP. Finland s rate of return at 8. (green bar), on its outward FDI is at the top end of OECD countries, slightly lower than 214 (see chart insert). On the other hand, the return to foreign investors in Finland was 5.1% in 215. 3

% GDP TUR SVN IRL ITA NZL LUX BEL HUN PRT POL ISL AUS CHL CAN NLD NOR EST FRA DEU GBR ESP AUT USA SVK GRC DNK SWE FIN CHE CZE LVA 18% Figure 6. Return on investment, income receipts and payments as a share of inward and outward stocks, 215 13% 8% 3% -2% Inward FDI return Outward FDI Return Source: OECD FDI Statistics (BMD4) and via exports Reflecting its significant outward investment, 52% of goods exports are by domestic MNEs, 15% are by domestic firms, while 33 per cent are by foreign-owned firms. The domestic MNE share is high compared to other small European countries, illustrating it is both domestic MNEs and foreign-owned firms that drive Finnish GVC participation. But Finland s export orientation is low relative to similarly sized economies Figure 7. Goods Exports by firm type, the role of Finnish MNEs 1 8 6 4 2 AUT DNK FIN FRA HUN ITA POL PRT Foreign-owned firms Domestic MNEs Domestic firms Source: OECD TEC statistics (211) Exports (in value added terms) contribute around 28% of Finnish GDP; this is towards the lower end of small OECD countries, which may reflect relatively low levels of inward investment, the import content of exports, a measure of GVC integration is comparable to some similar sized economies. The insert illustrates that Finnish export orientation has been decreasing over time. Figure 8. Export orientation, foreign affiliates value added and import content of exports, 214 8 7 6 5 4 3 2 1 LUX IRL HUN CZE SVK SVN EST LVA NLD BEL POL NOR AUT SWE DEU DNK PRT FIN ESP ITA GBR FRA JPN USA Domestic value added in foreign final demand (% of total domestic value added) Value added produced by foreign controlled enterprsies (share of domestic total) Foreign value aded in exports (% in exports) Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics 4

% GDP % GDP Not all of the domestic value added content of exports sticks in the economy Gross export figures overstate the real economic impacts of trade to the exporting economy, but TiVA estimates can also overstate these impacts as the profits earned by foreign-owned firms through exports are repatriated if they are not reinvested. Figure 9 illustrates the importance of these flows across countries by showing the value added in exports of domestically-owned firms (blue bar) wages paid by foreign-owned firms (green bar), and profits of foreign-owned firms (grey bar) which in practice can be repatriated. Excluding profits generated by foreign-owned firms, Finnish exports contain 26% of value-added that remains in the economy. So, only 7% of Finland s exported domestic value added represents profits by foreign-owned firms. The share of value added that remains in the economy decreased since 28, (see chart insert). Figure 9. Exports by ownership and their contribution to income, as a share of GDP, 214 8 7 6 5 4 3 2 1 LUX SVN CZE EST SVK HUN BEL AUT LVA NLD SWE NOR DEU DNK POL PRT FIN ESP ITA GRC FRA GBR USA VA that could be repatriated Labour costs of foreign firms Value added by domestic firms Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics Taking a broader view by including the income of foreign affiliates can provide a more complete picture of the international orientation of the Finnish economy Firms serve foreign markets by exporting or by selling through their foreign affiliates. Figure 1 takes a broader view of an economy s international orientation by taking account of both trade and investment. The chart begins with the domestic value added in exports that remains in the economy exports of value added by domestic firms (blue bar) and wages paid by foreign-owned firms associated with exporting (grey bar) and adds to it the profits that domestic MNEs receive from the activities of their foreign affiliates as measured by FDI income receipts (light blue bar). The income payments made to foreign parents are presented for informative purposes (green bar). For Finland, this broader measure, at 3 of GDP, is higher than the export orientation measure from TiVA because Finland is a net outward direct investor. However, this has decreased since 28 due to a drop in exports of domestic value added, (see chart insert). Figure 1. Supplying markets through trade and investment: a broad perspective, 214 9 7 5 3 1-1 LUX SVN EST NLD CZE SWE HUN SVK BEL DNK AUT LVA NOR FIN DEU PRT POL ESP ITA GRC FRA GBR USA -3 VA repatriated to parent by affiliates Labour costs of foreign firms associated with exports VA by domestic firms that serves foreign final demand VA repatriated to parent Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD FDI (BMD4) statistics 5

Partner share in total % Partner share in total % This broader perspective can also shed light on how foreign firms serve the Finnish market Foreign producers supplied products and services for Finnish final consumption equivalent to 37% of GDP in 214, the majority is through trade (foreign value added in Finnish final demand equals approximately 29% of GDP), but value added generated by foreign affiliates in Finland for domestic (non-export) sales (Figure 11) accounts for 8% of GDP. Although some of this value added can be repatriated to parents, the amount generated that is paid in wages is 6% of GDP. Figure 11. How foreign firms serve your market: a value added perspective, 214 7 6 5 4 3 2 1 EST LUX HUN LVA SVK SVN AUT POL SWE PRT FIN GBR DNK FRA NLD ITA USA Share of profits in VA of foreign-owned firms (sold domestically) Share of labour costs in VA by foreign-owned firms (sold domestically) Trade: FVA in domestic final demand Source: OECD-WTO Trade in Value Added Data, OECD AMNE and OECD TEC statistics Trade and investment by partner country Trade measured from a value added perspective better reflects the bi-lateral relationships Gross bilateral trade figures can disguise the true nature of trade interdependencies, particular between final consumers in one country and producers at upstream parts of the value chain. In the case of Finland, the relative importance of partner countries changes substantially; the United States is a more important export partner than Sweden, Russia and Germany using value added, contrary to what gross data suggest. Figure 12. Exports: gross and value added terms, by partner country, 214 12 1 8 6 4 2 Figure 13. Imports: gross and value added terms, by partner country, 214 14 12 1 8 6 4 2 USA RUS SWE DEU CHN GBR JPN IND FRA ITA DEU SWE RUS CHN USA IND GBR FRA ITA NOR Domestic value added exports Gross exports Foreign value added Gross Imports Source: OECD-WTO TiVA Data Source: OECD-WTO TiVA Data 6

Share in manufcaturing total % in exports Millions of USD and interdependencies are further revealed when looking at the broader notion of trade Foreign firms can serve an economy though trade or sales by foreign affiliates; bringing the trade and investment perspectives together can shed a different light on who a country's most important partners are (Figure 14). Once including data on foreign affiliates, Sweden is almost as important as Germany when supplying the Finnish market. United Kingdom and France supply Finland through both trade and investment while Russia and China do so mainly through trade. The United States supplies Finland mainly through sales by foreign affiliates, and moves ahead of the range of countries from Russia to Norway once trade and investment are combined. Figure 14. Supplying the Finnish market via trade and investment: Top 1 partner countries, 214 12 1 8 6 4 2 DEU SWE USA RUS CHN GBR IND FRA NLD NOR Sales by foreign affiliates (VA by foreign controlled firms (sold domestically)) Trade (Foreign value added in domestic final demand) Source: OECD-WTO TiVA Data and OECD AMNE statistics Trade and investment by industry Inward investment helps shape Finland s GVC integration The top manufacturing exporting industries in Finland are Pulp and paper products (PAP), machinery and equipment (MEQ), and basic metals (MET). The import content of exports varies across industriesillustrating the role that importing plays in supporting exports and indicating the degree of GVC integration in these industries. The chemicals and chemical product industry (CHM) accounts for the highest share of value added by foreign-owned firms. 3 25% 2 15% 1 5% Figure 15. Top exporting manufacturing industries in Finland, 214 1 8 6 4 2 PAP MEQ MET CHM PET ELQ WOD CEQ FBM Exports Imports VA by foreign-owned firms Import content of exports (RHS) Source: OECD-WTO Trade in Value Added Data and OECD AMNE statistics. See page 1 for a description of industry codes. 7

% GDP Domestic industry VA in foreign final demand (% of total) VA by foreign-controlled enterprsies (share of domestic total) Exports and imports go hand in hand Across most industries there is a strong correlation between higher import content of exports and a higher share of their domestic value-added being exported (export orientation) illustrating the strong complementarity of exports and imports. Figure 16. Import content of exports and export orientation, 214 1 9 8 7 6 5 4 3 2 1 CHM PAP TEX TRQ RBP MEQ WOD FBM FOD NMM OTM CEQ MET MTR 2 4 6 Import content of exports % Source: OECD-WTO TiVA Data and OECD AMNE statistics Figure 17. Foreign-owned firms and export orientation, 214 8 6 4 2-2 -4 FOD CEQ CHM NMM TRQ MEQ MTR FBM RBP OTM PAP WOD TEX MET 2 4 6 8 1 Domestic industry VA in foreign final demand (% of total) Source: OECD-WTO TiVA Data and OECD AMNE statistics...and investment and export orientation can also go hand in hand At the same time, strong complementarities exist between inward investment and export orientation (Figure 17). For Finland, the industries where foreign-owned firms produce more of the value added are also those that have a higher export orientation. Figure 18 illustrates the trade in goods by firm ownership; domestic MNES are driving Finland s goods export behaviour, reflecting the strong domestic industry, while foreign-owned firms also play a significant role. Figure 18. Gross trade in goods by enterprise ownership and industry, as a per cent of GDP, 211 5. 4. 3. 2. 1.. Source: OECD TEC Statistics PAP MEQ MET CEQ ELQ MET MEQ CEQ FOD CHM ELQ Exports Imports Domestic non-mnes Domestic MNEs Foreign-owned enterprises Service industries play an important role in the export orientation of an economy Typically, services account for a large share of the value added in the economy but conventional gross trade statistics understate this as they cannot reveal the contribution that the upstream services industry plays in the production of goods exports. Accounting for this contribution, the services content of Finland s total exports of goods and services was 55% in 214 (Figure 19), below the OECD average of 8

Domestic services value added share of gross exports CHL MEX KOR NOR CAN SVK CZE AUS DEU JPN HUN SVN POL TUR FIN ITA USA AUT PRT ESP NZL ISL SWE EST ISR LVA FRA CHE GRC GBR BEL DNK IRL LUX Services content of exports 57%. Looking at the services content of manufactured goods alone, 42% of the total value of Finnish manufacturing exports reflects services value added, above the OECD average of 36%. 1 Figure 19. Services content of exports for OECD countries, 214 8 6 4 2 Foreign Services VA content in Exports Total Domestic Services VA in Exports Source: OECD-WTO TiVA Data and so inward FDI in the services sector can be an important channel for export success Greater foreign investment in the services sector is associated with higher services content in exports. For Finland, the share of investment in services is close to the median of OECD economies, in line with its services content of exports. Figure 2. Share of services industries in foreignowned firms value added and domestic services value added share of gross exports, OECD countries, 214 6 5 4 3 2 GBR BEL FRA DNK ESP GRC EST AUT LVA ITA PRT NLD POL DEU SWE FIN LUX SVN NOR SVK CZE HUN 1 2 4 6 8 1 Share of services industries in foreign-owned firms value added Source: OECD-WTO TiVA Data and OECD AMNE statistics Links and data sources Guide to the trade and investment statistical notes www.oecd.org/investment/guide-trade-investment-statistical-country-notes.pdf Activity of Multinational Enterprises - AMNE www.oecd.org/sti/ind/amne.htm OECD Benchmark Definition of Foreign Direct Investment - 4th Edition (BMD4) (see Chapter 8 for information on the intersection of AMNE and FDI data) www.oecd.org/investment/fdibenchmarkdefinition.htm Foreign Direct Investment (FDI) Statistics www.oecd.org/investment/statistics.htm Trade by Enterprise Characteristics - TEC www.oecd.org/std/its/trade-by-enterprise-characteristics.htm Trade in Value Added - TiVA www.oecd.org/sti/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm 9

Table of industry codes Industry Type Ind Code Industry Description Primary Industries Manufacturing Services AGR MIN FOD TEX WOD PAP PET CHM RBP NMM MET FBM MEQ CEQ ELQ MTR TRQ OTM EGW CON WRT HTR TRN PTL FIN REA RMQ ITS BZS GOV EDU HTH OTS PVH Agriculture, hunting, forestry and fishing Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Computer, electronic and optical products Electrical machinery and apparatus n.e.c Motor vehicles, trailers and semi-trailers Other transport equipment Manufacturing n.e.c; recycling Electricity, gas and water supply Construction Wholesale and retail trade; repairs Hotels and restaurants Transport and storage Post and telecommunications Finance and insurance Real estate activities Renting of machinery and equipment Computer and related activities Research and development & Other Business Activities Public admin. and defence; compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons OECD 217. This note is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this note as: OECD (217), Finland: Trade and Investment Statistical Note. 1