VII. INVESTMENT CLIMATE - Openness to Foreign Investment Up to the mid-1980's, Sweden's approach to direct investment from abroad was quite restrictive and governed by a complex system of laws and regulations. There were laws that allowed Swedish companies to restrict foreigners from acquiring their shares, laws that required foreigners to obtain permission to transact business in Sweden, foreign exchange controls, and a system of concessions and authorizations -- all of which made investing in Sweden somewhat problematic for outsiders. During the 1980's, doubts were raised about the effectiveness and desirability of controlling foreign direct investment (FDI) in Sweden. Such considerations, together with Sweden's decision to seek membership in the European Union (EU), brought changes in attitude to and legislation on FDI in Sweden. The Swedish authorities have also implemented reforms to improve the business regulatory environment that will benefit investment inflows, and are seeking ways to ensure wider ownership in Swedish industry, which they feel will increase competitive pressures and lead to greater efficiency. A major stepping-stone to EU membership was achieved in early 1994 when Sweden's agreement with the EU on the European Economic Area (EEA) came into force. There is now almost total harmonization of Sweden's commercial and financial law, regulations, and business practices with those of the EU. For instance, foreign exchange transactions have been decontrolled; the law requiring foreigners to obtain permission to acquire shares or holdings in Swedish firms has been abolished; and real estate regulations have been changed so that foreigners can now acquire commercial real estate and land for mining in Sweden. The abolition of the law that required foreigners to obtain permission to transact business in Sweden makes it easier for foreigners to invest in any form, including greenfield investments, which in the past have been modest. Also the former corporate practice of restricting some shares from foreign acquisition has been abolished. Today, all shares listed on the Stockholm Stock Exchange may be acquired by Swedes and foreigners alike, though shares may still have differing voting strengths. The regime for foreigners in financial services has been liberalized, too. Now, banks, foreign brokerage firms, and cooperative mortgage institutions are permitted to establish branches in Sweden on equal terms with domestic firms. These fundamental changes in Sweden's FDI regime have significantly sweetened Sweden's investment climate and opened the country to foreign mergers and takeovers. Nevertheless, there remain a number of practical impediments to direct investment in Sweden. These include a fairly extensive, though non-discriminatory, system of concessions and authorizations needed to engage in many activities, and the dominance of a few, very large players in certain sectors, e.g. construction and food wholesaling. One of the economic policy cornerstones of the right-center coalition government which came to power in 1991 was a program to wholly or partly privatize many government-owned enterprises. While several corporations have actually been sold under the program, the severe 1991-1993 recession hampered progress in this area. Shares have been offered to domestic and foreign purchasers alike. The Swedish Government provides many kinds of incentives to research and development programs through the National Board for Industrial and Technical Development (Swedish acronym, NUTEK). The country spends the equivalent of almost 3 percent of its GDP on research and development, which is one of the highest rates in the world. The Government pursues a regional development policy in order to generate more employment in certain areas of the country. There is a wide range of regional support which provides incentives for investing in these areas, and such support will not be affected by eventual Swedish membership of the EU. - Conversion and Transfer Policies There are no foreign exchange controls in Sweden, nor are there any restrictions on remittances of profits, of proceeds from the liquidation of an investment, or of royalty and license fee payments. A subsidiary or branch may transfer fees to a parent company outside of Sweden for management services, research expenditures, etc. In general, yields on invested funds, such as dividends and interest receipts, may be freely transferred. A foreign-owned firm may also raise foreign currency loans both from its parent corporation and credit institutions abroad. - Expropriation and Compensation Private property is only expropriated for public purposes, in a non-discriminatory manner, and in accordance with established principles of international law. - Dispute Settlement There have been no major disputes over investment in Sweden in recent years. The country has written and consistently applied commercial and bankruptcy laws, and secured interests in property are recognized and enforced. Sweden is a member of the International Center for the Settlement of Investment Disputes and is a signatory to the New York Convention on the recognition and enforcement of foreign arbitral awards. It may be of interest to note that the Arbitration Institute of the Stockholm Chamber of Commerce is one of the leading arbitration centers in the world, many of its disputes originating in East-West business relations. An agreement between the American Arbitration Association and the Russian Federation Chamber of Commerce, reached in 1993, provides for arbitration to take place in Sweden under the Rules of the United Nations Commission on International Trade Law, with the Stockholm Chamber of Commerce administering the cases and acting as appointing authority if needed. - Performance Requirements/Incentives Sweden imposes no performance requirements on presumptive investors but offers certain incentives to set up a business in various targeted depressed areas. Loans are available on favorable terms from the National Board for Industrial and Technical Development and the Regional Development Funds, and a range of regional supports, including location and employment grants, reduced payroll taxes, low-rent industrial parks, and economic free zones, are also available. Regional development support is concentrated in the lightly populated northern two- thirds of the country. - Right to Private Ownership and Establishment Rights of this kind are not specifically written into Swedish law, but individuals and Swedish entities are well protected by the legal system. Private enterprises enjoy as great an access to markets necessary for conducting business operations as do public enterprises. - Protection of Property Rights The Swedish legal system provides adequate protection to all property rights including intellectual property. As a signatory to the EEA Agreement, Sweden has obtained adherence to a series of multilateral conventions on industrial, intellectual, and commercial property, with the exception of the 1989 Madrid Protocol on the International Registration of Trademarks, to which Sweden will adhere by January 1, 1995. Patents are adequately protected under the terms of the EEA Agreement, which states that the EFTA countries comply in their laws with the substantive provisions of the European Patent Convention of 1973, which Sweden ratified in 1980. Protection in all areas of technology may be obtained for 20 years. Copyrights. Sweden is a signatory to various multilateral conventions on the protection of copyrights, including the Berne Convention of 1971 and the Rome Convention of 1961. The EEA Agreement deals with the exhaustion of rights under Article 2 of Protocol 28. Swedish copyright law protects computer programs and data bases. Sweden protects trademarks under a specific Trademark Act (1960:644) and has undertaken to adhere to the 1989 Madrid Protocol (see above) by 1995. Proprietary information is fully protected under Sweden's patent and copyright laws. Semiconductor Chip Layout Design. The EEA Agreement's Article 4 of Protocol 28 addresses this specific question. - Regulatory System: Laws and Procedures As a signatory to the EEA Agreement, Sweden has altered its legislation to comply with the EEA's stringent rules on competition. As described above, the country has made extensive changes in its laws and regulations to harmonize with EU practices prior to obtaining EU membership, all with a view to avoid distortions in or impediments to the efficient mobilization and allocation of investment. - Efficient Capital Markets and Portfolio Investment Credit is allocated on market terms and is made available to foreign investors in a non-discriminatory fashion. The private sector has access to a variety of credit instruments, and legal, regulatory, and accounting systems are transparent and consistent with international norms. The Stockholm Stock Exchange is a modern, open, and active forum for domestic and foreign portfolio investment. It is an official institution and operates under specific legislation. The estimated total assets of the country's five largest banks were SEK 1,240 billion, the equivalent of USD 159 billion, at the end of 1993. The Swedish banking system is sound although the commercial banks suffered serious losses in the wake of the real estate and financial crisis which affected many West European countries in the late 1980's and early 1990's. The Swedish Government stepped in to shore up the system, providing commitments which totaled SEK 89 billion (USD 11.4 billion) by the end of 1993. SEK 68 billion of this sum had been disbursed. No further government undertakings have since been deemed necessary. Sweden's modern business environment, with its large transnational corporations, has, of course, adapted itself to recent deregulatory trends and consequent growing exposure to hostile takeover. Major firms are frequently owned by a confusing maze of owners. Such cross- shareholding arrangements have been set up not as a specific defense against foreign investment but against unwanted investment from any quarter. - Bilateral Investment Agreements Sweden has concluded bilateral investment promotion and protection agreements with the following countries: Argentina (1991), Bolivia (1990), China (1982), Cote d'Ivoire (1965), Czechoslovakia (1990), Egypt (1978), Estonia (1992), Hungary (1987), Indonesia (1992), Latvia (1992), Lithuania (1992), Madagascar (1966), Malaysia (1979), Morocco (1990), Pakistan (1981), Poland (1989), Senegal (1967), Sri Lanka (1982), Tunisia (1984), Yemen (1983), and Yugoslavia (1978)--now valid with Slovenia. Sweden has also signed investment agreements with the following countries, though they have not yet come into force: Bulgaria (1993), Chile (1993), Peru (1994), and Vietnam (1993). Sweden is a signatory of the OECD's Guidelines for Multinational Companies, a voluntary and multilateral undertaking which states that foreign investors should receive no less favorable treatment than that extended to domestic firms. - OPIC and Other Investment Insurance Programs N/A - Labor Sweden's labor force of 4.4 million is disciplined, well educated and experienced in almost all modern technologies. About 87 percent of the work force belongs to a labor union, among the highest rate of unionization in the world. Swedish unions have helped to implement rationalization and strongly favor employee education and technical progress. Management-labor cooperation tends to be excellent and non-confrontational. Labor, employers, and the Government all openly welcome U.S. investment and involvement in the Swedish economy. Replacing an earlier strict division between blue- and white-collar workers, new work organization and technology are demanding more teamwork at workplaces. This is usually warmly welcomed by trade unions. Some companies have started to treat all workers more uniformly by introducing agreements covering both blue- and white-collar workers. Sweden has co-determination legislation which provides for labor representation on the boards of corporate directors. This law also requires management to negotiate with the appropriate union or unions prior to implementing certain major changes in company activities and calls for a company to furnish information on many aspects of its economic status to labor representatives. Labor and management usually find this system works to the benefit of both sides. Long accustomed to unemployment rates of 3 percent or less, Sweden's labor force is currently suffering its highest jobless rate since the 1930's. Open unemployment in Sweden continued to rise during 1993 from the very low figure of 1.5 percent of the work force in 1990 to level out at about 8.5 percent in late- spring 1994. Assuming 2-3 percent annual growth, unemployment is forecast to decrease by about one percent a year for the next several years. With these high levels of unemployment, and a well-educated work force, there are no significant areas of labor skill shortage in industry at present. There is no fixed minimum wage by legislation. Instead, wages are set by collective bargaining. This is preferred by both labor and management. Regarding Swedish entry into the EU, for example, both unions and employers are opposed to the EU establishing by directive any minimum wage or any other workplace regulation that can instead be covered by collective bargaining. This was recognized in a provision in Sweden's EU accession agreement completed in early 1994. According to U.S. Bureau of Labor Statistics figures, Sweden's average hourly compensation cost (including pay, benefits, social fees, taxes, etc.) for each production worker in manufacturing in 1993 at average exchange rates was USD 17.91. That is cheaper than the cost in Germany, Japan, the Benelux, Austria, Norway, Denmark, and a number of other countries, but about a dollar more than in the United States, which was USD 16.79. The old system of centralized wage bargaining between the employers' associations and the trade union confederations has been replaced by more decentralized negotiations. In recent years, the unions have been in a weaker position vis-a-vis employers and have made relatively moderate wage demands. The 1993 round of wage negotiations was settled without any major strikes or disruption. No economically significant work stoppages or disputes are likely in the remainder of 1994. The next union-management negotiating round will take place in the spring of 1995. Some uncertainty still surrounds the question of the wage formation process. The new leadership of the Swedish Confederation of Trade Unions (LO) wants a degree of centralized bargaining in the 1995 round. The Employers' Confederation (SAF) insists, however, that there will be no further centralized negotiations and that firms more than ever need the flexibility to pay wages according to profitability and individual qualifications. While a handful of employers may still be concerned about the potential for a higher risk of labor unrest in the absence of centralized negotiations, most employers are pleased with substantially less centralization. With currently high levels of unemployment, wage considerations seem less important among labor rank and file than does job security in many sectors of the economy. Sweden has ratified most ILO conventions dealing with worker rights, freedom of association, collective bargaining, and the major working conditions and occupational safety and health conventions. Sweden's two largest labor confederations have charged the Government with non- compliance with some ILO standards regarding several minor changes in 1993 to the country's labor laws. Nonetheless, respect for worker rights is observed both in law and in practice. In many instances, Sweden exceeds ILO standards. - Foreign Trade Zones/Free Ports Sweden has foreign trade zones with bonded warehouses in the ports of Stockholm, Goteborg, and Malmo. Goods may be stored for an unlimited time in these zones without customs clearance, but they may not be consumed or sold on a retail basis. Permission may be granted to use these goods as materials for industrial operations within a free trade zone. The same tax and labor laws apply to foreign trade zones as to other workplaces in Sweden. - Capital Outflow Policy There are no policies or restrictions prohibiting capital outflow from Sweden. The country serves as a home base for a number of large multinational corporations with extensive worldwide operations. These corporations have been moving into foreign markets and investing abroad since the 1960's. The deregulation of exchange controls in 1989 and the removal of restrictions on real estate investment abroad partly accounted for an increase in Swedish outgoing foreign direct investment during the latter part of the 1980's. Three government entities are involved in promoting Swedish investment in developing countries. These are the Swedish Agency for International Technical and Economic Cooperation (Swedish acronym BITS), which helps with large projects; Swedecorp, which operates at the small end of the cooperation spectrum; and Swedfund International AB, which provides risk capital and assists in establishing joint ventures. - Foreign Direct Investment (FDI) Statistics Sweden's FDI outflows represent a more important part of its gross domestic product than that for most OECD countries. Outgoing direct investment rose markedly in the booming latter half of the 1980's as firms sought to gain footholds within the EU. With Sweden's application for EU membership, three years of recession, and deflated real estate prices, Swedish net direct investment abroad peaked out in 1990 to tail off to less feverish levels. The recessionary period from 1991-1993 adversely affected incoming direct investment, despite the removal of most impediments to such investment in order to harmonize with EU practices. The United States is well represented on the Swedish business scene through subsidiaries which in 1992 employed 28,000 people, or 12-1/2 percent of the work force of all foreign-owned subsidiaries in Sweden. The estimated book value of direct U.S. investment in Sweden at the end of 1992 stood at $2.0 billion (U.S. Department of Commerce figure), $1.3 billion of which was in manufacturing and $450 million in wholesale. The United States is represented in Sweden by a branch of Citibank. The following tables show the pattern of foreign direct investment in Sweden and, for comparison purposes, a breakdown of Swedish investment abroad. MAJOR FOREIGN CORPORATE INVESTMENTS IN SWEDEN 1993 (MILLION U.S. DOLLARS) FOREIGN INVESTOR SWEDISH TARGET MIL. USD Akzo NV, Netherlands Nobel Industries 3,060 GE, United States Finax Group 488 Veba AG, Germany Sydkraft AB (to 4 pct.) 197 Wolters Kluwer NV, Netherlands Liber AB 164 Pacific Telesis Group, United States Nordictel Holdings 153 Statoil, Norway British Petroleum Co's Swedish gas stations 133 American Express, United States Nyman & Schultz 119 Huhtamaki OY, Finland Procordia's European Confectionery Business 115 Philip Morris, United States Estrella 88 Metra, Finland Euroc (12.5 pct) 76 Partek, Finland Euroc (12.5 pct) 76 Credit Lyonnaise, France Cool Carriers 67 Wolseley Plc, UK Enertech Industries 67 Orkla AS, Norway Bob Industrier AB MAJOR SWEDISH CORPORATE INVESTMENTS ABROAD, 1993 (MILLION U.S. DOLLARS) SWEDISH INVESTOR FOREIGN TARGET MIL USD Procordia AB Farmitalia, Italy 1,300 Svenska Cellulosa AB Aylesford Newsprint, UK 187 Procordia AB Huhtamaki OY, Finland 115 Euroc AB Partek Cement, Finland 76 Aga AB Entrepots et gares frigorifiques, France 64 Incentive AB MacGregor-Navire, Finland 61 Aga AB Polgaz Koscian, Poland 59 Ericsson Unimor, Poland (1/3) 25 Tetra Pak Hitek Packaging Patents, Australia 8 Volvo AB Xian Silver Bus Corp., China 8 Procordia AB Magyar Altalanos Gyufaipari, Hungary 7 Atlas Copco AB Kango Ltd, UK 6 Ikea AB Szczecinski Przemysl, Drzewny, Poland 6