Globalisation and Danish Direct Investments

Maria Carlsen, Economics and Annett Melgaard, Statistics

INTRODUCTION AND SUMMARY

Direct investments by business enterprises across national borders are one of many indicators of the degree of globalisation. Foreign direct investment (FDI) creates direct, stable long-term financial links between economies, thereby contributing significantly to economic integration.

As a result of the integration of countries such as China and India into the global economy, globalisation has gathered momentum over the last decade. Danish FDI is, however, still mainly concentrated in countries geographically close to Denmark, as is Denmark's trade in goods. The share of Danish direct investments in China has been increasing in recent years, but remains low.

When Danish business enterprises make FDI, the enterprise they invest in is often one within their own industry. An exception applies to Danish trading enterprises, which place a substantial share of their investments in foreign industrial enterprises. Industrial enterprises account for a larger share of Danish direct investments in Brazil, Russia, India and China (the BRIC countries) than in EU member states. This may be attributable to factors such as lower production costs in the former countries.

Direct investment as such is a pure financial measure, but it may have real economic consequences, e.g. in terms of employment.

This article focuses on the breakdown by country and industry of outward Danish FDI, while also illustrating the employment effects in Denmark when Danish business enterprises increasingly engage in foreign activities. The analyses are performed on the basis of enterprise-specific reporting to Danmarks Nationalbank's FDI statistics, supplemented with employment data from these enterprises.

GLOBALISATION AND DANISH DIRECT INVESTMENTS

The process of globalisation has been going on for many years. Technological advances have made it easier to set up abroad, as communication and transport have become faster and cheaper. This has contributed to the increasing importance of FDI to the global economy. Danish inward and outward FDI as ratios of GDP have increased substantially since the early 1990s, cf. Chart 1. This article mainly focuses on Danish outward FDI stocks, excluding pass-through investments, cf. Box 1.

Danish direct investments are at roughly the same level as those of comparable countries, cf. Chart 2. Conditions for direct investment have generally been favourable in recent years owing to robust macroeconomic growth in many countries, large corporate profits, a low general level of interest rates, etc.

Denmark's inward and outward FDI are of more or less the same size. Since 2004, outward FDI has, however, exceeded inward FDI, although several large Danish enterprises have been targets of acquisitions in recent years.^[1]

DIRECT INVESTMENTS BROKEN DOWN BY COUNTRY AND INDUSTRY

FDI and trade are often interlinked, although the connection is ambiguous. By making a direct investment in a given country, a business enterprise obtains access to a foreign market. If it decides to manufacture and sell its products in the country in question, the investment may be a substitute for trade, entailing lower exports to that country. However, exports will not decline if the business enterprise simply sets up a sales and distribution unit abroad. Direct investments abroad can also be driven by a wish to reduce the business enterprise's costs, e.g. by moving part of its production to countries where wages, etc. are lower.^[2]

Country breakdown of direct investments and trade
Danish outward FDI is concentrated in the EU member states, Norway and the USA, cf. Chart 3. Around half of the Danish direct investment in EU member states goes to the UK, Sweden and Germany. The country breakdown of trade in goods is, broadly speaking, in line with the distribution of direct investments. However, it is seen that China accounts for a relatively larger share of Danish imports than of inward FDI.

At the global level, industrialised countries have traditionally been the largest FDI investors and targets. Within the last decade the BRIC countries have, however, begun to play a more prominent role in the global economy. Since the mid-1990s, China has become the largest recipient of FDI in the developing world, and in 2006 China was in the global top 5 in terms of inward FDI.^[3] China's outward FDI is showing an upward trend, but nevertheless remains at a very low level. Investments in Denmark by China and other BRIC countries are virtually zero.Denmark's inward and outward FDI more or less balance, reflecting that the Danish economy is at a later and more mature stage in relation to FDI than e.g. the Chinese economy.^[4]

Danish direct investments in China have been increasing since the mid-1990s, albeit from a very low starting point, cf. Chart 4. The same development has been seen in exports to China, which have risen from a share of 0.4 per cent in 1994 to 1.3 per cent in 2006. The share of direct investments flowing to other BRIC countries has been more or less unchanged for a number of years and remains modest, while the share going to Japan has been decreasing.

Part of the explanation to the relatively low volume of investment in Asia could be legal and linguistic barriers, etc. In addition, the country breakdown of FDI does not always give a completely true picture, as business enterprises sometimes operate via a holding company. This means that the investment is registered in the home country of the holding company, not the company where the actual FDI is made. This statistical drawback will be addressed in the coming years, cf. Box 2.

Motives behind Danish outward FDI
Danish enterprises to a large extent invest in countries that are important trading partners of and geographically close to Denmark. This is in line with the key motives often cited for setting up abroad, i.e. a wish to be closer to the customers.^[5] As Chart 5 shows, FDI by Danish business enterprises at end-2006 was to a large extent concentrated on service industry in the recipient country, including trade.^[6]

A more detailed analysis of the data shows that around 64 per cent of FDI by Danish industrial enterprises goes to industrial enterprises, while approximately 25 per cent goes to trading enterprises, cf. Table 1. Turning to FDI by Danish trading enterprises, approximately 33 per cent goes to trading enterprises, while 66 per cent goes to industrial enterprises.

Danish outward FDI are primarily made by large enterprises. The largest 10 per cent of business enterprises with outward FDI – measured in terms of external assets – account for 75 per cent of Danish FDI. In other words, 77 large enterprises account for the greater part of Danish direct investments abroad.

There are many potential reasons for investing abroad, depending on the country and the circumstances.^[7] Most Danish direct investments in the EU are in service enterprises, while in the BRIC countries investments are primarily made in industrial enterprises, cf. Chart 6. More detailed data shows that Danish enterprises are more likely to concentrate on their own industry when investing in EU member states than when investing in the BRIC countries, cf. Appendix 1. This indicates that Danish business enterprises' direct investments in EU member states are aimed at strengthening their position in the market in question, and at moving closer to their customers. In the BRIC countries, on the other hand, the – modest – Danish investments are in industrial enterprises, indicating that the investors wish to benefit from low costs, or that they invest in order to facilitate access to emerging markets.^[8]

A breakdown of the EU into two groups shows that a slightly larger share of Danish FDI in the new EU member states (EU10) goes to industrial enterprises than is the case in the pre-2004 member states (EU15).^[9] The reason may be that production costs are lower in EU10 than in EU15. It should, however, be borne in mind that the volume of investment in EU10 is considerably lower than in EU15. In 2006, 58 per cent of total outward Danish FDI went to EU15, while 4 per cent went to EU10 and 3 per cent to the BRIC countries.

For the economy overall, factors such as productivity and payroll costs in relation to the level in other countries play a major role in determining what is manufactured at home and abroad, respectively.^[10] Labour productivity is determined by the size and efficiency of the physical capital stock, the level of education or training, the local infrastructure, the structure of the legal system and good governance in general.^[11] These conditions are often jointly referred to as the "framework conditions" of the various countries. Complex interaction between many factors thus determines the country distribution of global production and its composition.

ESTABLISHMENT OF DANISH AFFILIATES ABROAD AND EMPLOYMENT IN DENMARK

When Danish enterprises set up abroad, foreign jobs are created – all other things being equal. Likewise, Danish jobs are created when foreign enterprises invest in Denmark.

Nevertheless, positive employment effects may also be seen in Denmark when Danish enterprises expand internationally as this may, for example, generate more export orders for Danish enterprises. On the other hand, inward FDI may mean increased competition and loss of jobs for business enterprises already operating in Denmark.

Some direct investments have no immediate impact on employment, e.g. acquisitions where companies simply change hands. However, the new owner may try to create added value by cutting down or expanding, thereby reducing or increasing the number of employees. Consequently, there is no one-to-one relationship between direct investments and employment. Direct investments are ultimately a financial measure, while employment is a real economic variable. Employment is also affected by factors such as productivity-enhancing technological developments, whereby fewer people are needed to produce a given quantity of goods. Added value can thus be achieved without increasing the number of employees, and therefore employment figures do not necessarily reflect how business enterprises are faring.

Employment in foreign enterprises in Denmark
In 2003, 228,000 people were employed in 3,066 business enterprises in Denmark with more than 50 per cent foreign ownership.^[12] The number of employees in foreign enterprises in Denmark rose from approximately 10 per cent of all private-sector employees in the early 1990s to approximately 16 per cent in 2003.^[13] While foreign enterprises have gained importance in the Danish labour market, Danish enterprises have also become more active abroad. At the beginning of 2008, Danish enterprises had a stake of 10 per cent or more in 4,184 foreign affiliates, while in the early 1990s Danish enterprises owned approximately 2,000 business enterprises abroad.^[14]

Employment in Danish enterprises with direct investments abroad
It is difficult to assess how Danish outward FDI affects employment in Denmark since the impact may be felt not only by the investor enterprises themselves, but also by other Danish enterprises, e.g. their suppliers.

Some of the issues may be examined by looking at the development in the number of employees in Danish enterprises with outward FDI, cf. Tables 2 and 3. The underlying methodology is described in more detail in Appendix 2. It should be emphasised that the calculation is subject to some uncertainty.

Table 2 illustrates the development in employment in Denmark from 1999 to 2007 for Danish business enterprises with outward FDI throughout the period from end-1998 to 2006. Employment in industrial enterprises with FDI more or less matched the general level of employment in manufacturing. This is in line with the observations of the Confederation of Danish Industry (2003), which finds that industrial enterprises with foreign affiliates saw slightly better employment development in Denmark than other industrial enterprises in the period 1996-2002, while also achieving high growth in employment in their foreign affiliates.^[15]

According to the calculation in Table 2, however, service enterprises with direct investments abroad experienced employment development below the overall trend in the Danish service industry. One reason is that only few business enterprises in the service segments that have seen the highest growth in employment have made direct investments abroad. For example, employment has increased strongly in the "Other business service" sub-segment, comprising e.g. temp agencies, interior decorators and employment agencies.^[16] This segment predominantly targets the domestic market and practically no business enterprises had made direct investments abroad.

The number of Danish enterprises with direct investments abroad grew from 1998 to 2006. Table 3 therefore shows the development in employment from 2003 to 2007 for Danish enterprises with direct investments abroad in 2006. The pattern is the same as in Table 2.

Conclusion
The analysis indicates that Danish enterprises aim to expand and strengthen their position when they make direct investments abroad. This is illustrated by the fact that direct investments primarily take place in markets close to Denmark and within the investor's own industry.

On aggregate, Denmark's inward and outward FDI balance. However, direct investments by Danish industrial enterprises abroad exceed foreign investments in Danish industrial enterprises. Overall this points to a continued structural shift from manufacturing to service in the Danish economy. This may influence demand for labour with specific qualifications and within certain professional groups. Consequently, the economy must be adaptable and prepared for change, not least in terms of labour market conditions and education and training.

LITERATURE

Economic Council of the Labour Movement (2008), The upswing's winners and losers in terms of industry employment (in Danish only), 4 January.

Confederation of Danish Industry (2003), Danish enterprises setting up abroad (in Danish only), Etableringsundersøgelsen.

The Economic Council (2001), Danish Economy, Autumn, Chapter 3.

Business survey 1993 (in Danish only), Ministry of Economic Coordination, September.

Hansen, C. and M.F. Mortensen (2006), The Danish Business Sector in an International Perspective (in Danish only), Statistics Denmark, Theme Publication 2006:1.

Jayaswal, P., M. Kornvig and K. Skjærbæk (2006), Private Equity Funds, Capital Flows and the Foreign-Exchange Market, Danmarks Nationalbank, Monetary Review, 3rd Quarter.

Pedersen, B.T. (2007), International Direct Investment in Denmark and China in the 20th Century (in Danish only), Økonomi & Politik, Vol. 80, no. 2. 

Pedersen, E. H. (2007), Globalisation and the Danish Economy, Danmarks Nationalbank, Monetary Review, 1st Quarter.

Pedersen, E. H. and J. D. Riishøj (2008), Denmark's Wage Competitiveness, Danmarks Nationalbank, Monetary Review, 2nd Quarter.

UNCTAD (2007a), World Investment Report. 

UNCTAD (2007b), Rising FDI into China: The facts behind the numbers, Investment Brief, number 2. 

Ministry of Economic and Business Affairs (2003), Growth through Globalisation, Action Plan and Background Analysis (in Danish only), October.

APPENDIX 1: DETAILED TABLES OF DANISH DIRECT INVESTMENTS ABROAD

APPENDIX 2: METHODOLOGY FOR COMPILATION OF EMPLOYMENT IN DENMARK IN DANISH ENTERPRISES WITH FOREIGN DIRECT INVESTMENTS

This Appendix provides a brief description of the methodology for compilation of the number of employees in Denmark in Danish enterprises with foreign direct investments.

A list was generated of the CVR numbers of enterprises reporting to Danmarks Nationalbank that had FDI in 1998 and/or 2006. On the basis of this list, the number of employees was extracted from the data of the Danish Commerce and Companies Agency. The latter data contains the number of employees on the basis of ATP (Labour Market Supplementary Pension) statistics for the period 1999-2007. Employee data has been available for around three quarters of the CVR numbers.

However, using CVR numbers to identify relevant business enterprises entails certain problems. A CVR number may cease to be active, e.g. if the business enterprise merges and continues under another CVR number. Consequently, a given CVR number may comprise business enterprises before and after mergers and demergers.

Furthermore, some business enterprises with FDI may not report to Danmarks Nationalbank and are therefore not included in the list of CVR numbers. The compilation of direct investments is based on a sample with an average coverage ratio of 90-95 per cent.

The compilation of the number of employees in the period 1999-2007 includes business enterprises with FDI in both 1998 and 2006, while the compilation for the period 2003-2007 comprises only enterprises with FDI in 2006. Consequently, there may be business enterprises that did not have FDI throughout the period 2003-2006. It has been sought to adjust for individual large acquisitions, etc. in the two data sets, to the extent that it is possible to find reliable information.

The business enterprises surveyed were broken down by activity on the basis of the 9-standard grouping in Danish Industrial Classification, Statistics Denmark (DB03). The activities have been merged into the three activities in Table 2 and 3 of the main text. Manufacturing comprises manufacturing. Service comprises trade, etc.; transport, post and telecommunications; and finance and business activities. Other comprises construction; agriculture, etc.; electricity, gas and water supply; and public and personal services.