Multinationals: The Swedish Case (RLE International Business)

Erik Hornell, Jan-Erik Vahlne

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415656627
• eBook ISBN: 9781135133092
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book considers the question of the impact of multinationals on Sweden. Based on extensive original research the book examines the benefits and drawbacks of multinationals for Sweden. It relates the Swedish case of multinationals to theories of multinational enterprise and to theories of industrial change. It reviews the extensive debate within Sweden on the question and discusses the policy options available to Sweden. It argues that the mix within a multinational and the spatial distribution (either at home or abroad) of production, research and development, marketing and central functions is important in determining whether a multinational has a beneficial or adverse effect on a country like Sweden. As a small open economy which is considerably affected by movements in international trade Sweden provides the rest of the world with a unique example of the impact of multinational enterprises in terms of both outward and inward foreign direct investment.

PART ONE:

THE SWEDISH MULTINATIONALS: DESCRIPTION AND THEORY

1	SWEDEN: A SMALL OPEN ECONOMY

In the middle of the nineteenth century, Sweden was an extremely poor agricultural society, somewhat isolated from the rest of Europe. Today, Sweden is a heavily industrialised country, with an economy which is highly dependent on international exchange. A major proportion of Swedish industry, especially where foreign sales are concerned, is based on the multinational companies, numbering just over 100, covered by this book. In this first chapter, we shall describe the main characteristics of the Swedish economy, setting the scene for the expansion of Swedish multinational companies and the achievement of their current position. Quite a few of them had their roots in the latter part of the nineteenth century and the great expansion of foreign activities took place, at an increased tempo, after the Second World War. The new situation which we face today, with serious problems of balance in Swedish economy, is the picture which we have to use when evaluating the future development of the multinational companies.

Table 1.1: Basic Statistics about Sweden

The Land
Area (1,000 sq km)	450		Inhabitants in major cities, incl. suburbs (end of 1982), thousands:
Lakes	9%
Arable area	7%		Stockholm	1,402
			Gothenburg	694
Woodland	51%		Malmö	453
The People
Population (end of 1982), thousands			8,327
Number of inhabitants per sq km			19
Net natural increase (Average 1978–82), thousands			4
Production
Gross domestic product in 1982 (Skr billion)	623		Gross fixed capital formation in 1982, per cent of GDP	18.8
GDP per head, US $	11,909		Employment (1982) thousands	4,200
			Percentage of total:
			Agriculture, fisheries	5.1
			Industry	23.7
			Other	71.2
The Currency
Monetary unit: Krona
Currency unit per US $, average of daily figures 1983:		7.67

Source: OECD Economic Survey (1984)

How It All Started¹

The industrialisation of Sweden started rather late, especially in comparison with Great Britain, which was first in the field. In fact, it was the industrialisation of Great Britain and the subsequent expansion of construction investments that initiated Swedish industrialisation. Although Sweden possessed natural resources in the form of iron ore, forests and water, there were no domestic forces capable of starting up the industrial development process since Sweden was a small country with a largely agricultural population.

The expansion of building and construction activities in Great Britain meant a substantial increase in the demand for timber products which could only be supplied from abroad. This created an enormous boom for the Swedish wood-products industry in the period 1850–80. In addition, industrialisation in other parts of Europe led to increased demand for Sweden’s traditional export products, iron and steel, where Sweden had an important comparative advantage in the form of access to energy (charcoal). Forest products, iron and steel jointly comprised more than half of Swedish exports at this time while a further third was represented by agricultural products, mainly oats, which were used to feed the more than 250,000 horses used for transport in London. Great Britain was the destination of almost half of the Swedish export total and was quite clearly the dominant export market up until the outbreak of the Second World War. Today, Great Britain shares the role of leading export market with Germany and Norway — each of these three countries represents rather more than 10 per cent of Swedish exports.

The production of the original Swedish export products, iron, steel and timber products, required close proximity to raw materials and energy sources. Production was based on numerous small units which had no direct contacts with foreign markets — exports were arranged by merchant houses in Stockholm and Gothenburg, the major ports. Some of these merchant houses were founded by British businessmen; their personnel could speak foreign languages and were well acquainted with foreign markets. Furthermore, these merchant houses had access to capital, which was an advantage since the Swedish banking system was relatively undeveloped at this time. Wood and iron exports gave the merchants good returns, which were later used to finance the establishment of new industrial companies. The import of capital was also a significant factor in Swedish development although such imported finance was mainly used for investments in infrastructure, for example in railways.

When the demand for timber products finally began to slow down, the forest output was increasingly used on the manufacture of pulp and paper. New inventions made it possible to produce paper exclusively from wood fibre. Technological developments in the production of iron and steel also had important consequences for Sweden — coke could now be used instead of charcoal, and iron ore with a high phosphorus content became a viable raw material. These developments meant that Sweden lost its advantage as a producer of ordinary commercial steel but could, on the other hand, export ore with a high phosphorus content from the north of the country. Swedish iron and steel works began to switch from the production of commercial steel to special steel, where Sweden achieved a dominant position. The move into special steels also meant that the Swedish works began to concentrate on products designed to meet purchaser requirements, thus involving the development of new sales channels.

The forming and processing of metals developed from iron and steel production and this, in turn, later became the basis for the Swedish engineering industry. The 1880s was probably the most creative period in the development of Swedish industry — many of today’s major engineering multinationals were founded in this period, for example Alfa-Laval, Ericsson and ASEA. The innovations on which these companies were based often originated abroad but were then adapted and developed by Swedish engineers. The boom in the engineering industry was also based on a major investment in technological education and training where studies abroad played an important part — many Swedish engineers received their training abroad, especially in England. Thus, in this respect, too, impulses from outside the country were decisive in determining future development.

The new industrial companies, based on innovation, began to export and establish foreign contacts at an early stage. The travelling salesmen who prepared the way for the export success of Swedish companies played a vital, if not particularly glamorous, role in these developments. Ericsson, for example, employed an Englishman who travelled around Russia with telephones in his suitcase — he is said to have sold 600 telephones to a telephone exchange in Kiev in 1893. Ericsson, AGA and Alfa-Laval also established manufacturing operations abroad in the 1890s. Alfred Nobel’s corporation, Nitroglycerin AB, had already started manufacturing in ten different countries in the 1870s. The next great wave of Swedish establishment abroad came in the boom of the 1920s. SKF was already the most internationalised company, although it had only started operations in 1907. By 1933 SKF was selling in 56 countries outside Sweden, had sales companies in 26 countries and manufacturing facilities in five countries; 60 per cent of SKF group employees were foreigners.

Sweden’s non-participation in two world wars was, of course, a contributory factor in Sweden’s successful economic development in the twentieth century. Swedish companies were able to supply goods for reconstruction abroad after both world wars since the Swedish production aparatus had not been destroyed. Furthermore, after the First World War Sweden was able, de facto, to write off a major proportion of its foreign debts as a result of foreign inflation. Sweden came relatively unscathed through the depression of the 1930s, since the Swedish krona was heavily undervalued after Sweden abandoned the gold standard in 1931.

The Golden Years

The decades immediately after the Second World War represented a period of record expansion for Swedish industry. In many respects, this stage in the development of the Swedish economy corresponds to the international picture. Restricted foreign trade, in the 1930s, and wartime embargoes meant that Swedish industry was not highly specialised in the late 1940s. There were two important reasons for the rapid increase in productivity that then took place. One reason was the increase in foreign trade resulting from the removal of trade barriers. Better and cheaper transport and freight also stimulated trade — although this was a negative factor for Swedish iron ore and paper pulp since the positional advantages were lost vis-à-vis transatlantic competitors.

The foundation of the EEC in 1957 and EFTA (of which Sweden is a member state) in 1960 played an important part in the internationalisation of Swedish industry. Sweden’s position deteriorated vis-à-vis the EEC countries but incentives to trading with the Nordic countries within EFTA increased. As we will see in Chapter 3, many Swedish companies decided to set up production within the EEC in order to maintain and expand their sales in this region. Sweden later signed a free trade agreement with the EEC, but this did not come into effect until 1973 and tariffs were not completely abolished until 1977.

The second factor which was of great importance in increasing productivity was the so-called ‘wage solidarity’ which meant that wages and salaries were increased at about the same rate in all companies. This meant that the least productive companies were eliminated and that the labour force gradually moved to the more productive companies. The result was a greater increase in total industrial productivity than can be explained purely by increased investments and technological development linked with such investment.

In the mid-1960s, Sweden achieved an ‘all-time high’ share of world exports. However, Swedish companies began to meet severe and increased international competition. The main reason for the stiffening of the competitive climate was that other countries had now completed the reconstruction of their production capacity and, in fact, in many cases had more modern plants. In retrospect, some observers have maintained that Sweden did not push through a programme of structural change hard enough in the 1950s, since it was still possible to sell the output of inefficient production units while post-war demand remained at a high level. It has also been said that the investments which were undertaken were excessively aimed at increasing productivity and that more long-term or future-oriented investments were neglected. Companies concentrated too much on measures which improved productivity because wages for unskilled labour were relatively high. When, subsequently, global surplus capacity developed in many industries, Sweden was faced with several acute problems.

The New Situation

Although Sweden, as an industrial power, reached its peak in the mid-1960s, the country’s relative decline did not become obvious until well into the 1970s. The turning point in the early 1970s is a phenomenon which affected several countries, but subsequent development has been worse in Sweden’s case. The international recession of 1974–5 hit harder than any similar downturn in the post-war period. In Sweden’s case, the negative effects of the recession were reinforced because certain key Swedish industries, such as shipbuilding, forest products and iron and steel, were especially affected. The market for 15–20 per cent of Swedish output practically disappeared after 1975.

Swedish economic policy aimed at expansion in order to maintain employment levels. When business improved in 1975, industry agreed to 40 per cent wage and salary increases in 1975–6. On top of everything, the Swedish krona was tied to the Deutschemark which meant that the krona was de facto revalued against most other currencies. The combined effect of wage increases and a more expensive krona was disastrous for the Swedish industry’s international competitiveness. We shall return to these problems when we discuss the export effects of foreign investments.

In order to restore some sort of balance, the krona was devalued several times. It proved to be difficult, however, to regain market shares once they had been lost. Figure 1.1 s...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Title Page
• Copyright
• Contents
• Preface
• List of Figures
• List of Tables
• Part One: The Swedish Multinationals: Description and Theory
• Part Two: Impact of Foreign Direct Investment on Swedish Industry
• Bibliography
• Appendices
• Index