4. Finland's business climate in the eyes of foreign investors

Abstract

This chapter complements the assessment of Finland’s regulatory framework and its potential impact on FDI by outlining foreign investors' views on regulation and the general business environment in the country. Describing the results of consultations held with foreign-owned businesses in Finland, and other Finnish stakeholders, the chapter reports foreign investors’ motivations for choosing Finland as an investment location. It then discusses companies and other stakeholders' perceptions of various aspects of Finland’s regulatory environment and whether these factors represent obstacles to entering the country and running day-to-day operations. In addition, the chapter maps out consulted businesses’ use of funding and incentive mechanisms available in Finland, their future investment plans, and past and expected impact of the COVID-19 outbreak on the respondents’ business activity.

Key findings

Nearly all interviewed foreign companies viewed technology, knowledge and skills as the leading drivers of their investment in Finland. Market access and linkages to local partners were among other important aspects of the investment decisions.
The interviewed firms experienced little difficulties setting up operations in Finland and many praised interactions with Finnish public authorities. However, several respondents wished for streamlined permit procedures and a more predictable operating environment in terms of regulation and its implementation, especially on taxation.
Strict labour regulation (hiring and firing, working hours and salaries) and labour taxation were the most important regulatory obstacles businesses reported facing in Finland. The rigidity of labour market conditions and excessive bureaucracy attached to recruiting foreign workers were thought to hinder companies’ growth and internationalisation prospects. Many businesses wished for a lower level of employees’ personal income taxation.
Several interviewees brought up shortcomings in public procurement, including complicated processes, price-driven selection criteria and transparency-related concerns.
Despite the several incentives available for businesses, many respondents indicated difficulties accessing local funding, grants or subsidies, or wished for additional (tax) incentives. R&D funding was the most common incentive that companies had made use of.
Over the next three years, most respondents are planning to expand their operations in Finland. Growing demand prompts most of the investment plans.
The COVID-19 pandemic disrupted operations of most interviewed businesses. While some were hit particularly hard, many firms managed to mitigate the impact of the pandemic thanks to timely risk-management strategies and slight changes to their operations.

4.1. Introduction

There are several different reasons why multinationals decide to locate in a given country. Often their motivations are quite complex and respond to many aspects that cannot be easily classified. Some of these aspects are well beyond the reach of policy makers and can be motivated by company-specific strategic considerations, while others can be targeted by well-designed investment policies aimed at improving the existing business environment to attract more FDI.

Several studies and business surveys discuss drivers of FDI in Finland. Access to technology and technical expertise are often mentioned as important triggers of investment flows to the Finnish economy.1 Moreover, knowledge and innovation capacity are emphasized by many foreign investors as important factors of location choice.2In addition, high quality of institutions, political stability and low corruption are often brought up by investors as some of the strengths of the Finnish economy.3 However, similar to other Nordic countries, Finland is considered a high-cost economy for investment, which makes it less attractive for foreign firms seeking efficiency along the value chain. Several surveys bring up the rigidity of its labour market, naming labour costs and inflexibility of working contracts as key obstacles to investing in Finland.4

A few recent studies also discuss regulatory frictions in the Finnish economy as impediments to trade and investment. For instance, a survey documented that some businesses found the transitional period to adjust their operations to new legal provisions too short, while others struggled with lengthy permit approval processes in some sectors.5Another study found that the discretionary nature of investment incentive programmes may complicate the evaluation of business opportunities for foreign investors and, eventually, undermine their confidence in the business environment.6

This chapter seeks to enrich the existing evidence by mapping out foreign investors' views on a number of nuanced aspects of Finland's regulatory and business environment. It complements the findings presented in previous chapters by providing an assessment of Finland as an investment location and its operating environment from the perspective of foreign investors themselves. It describes the results of consultations held in October 2020 with foreign-owned businesses that have entered the Finnish market either via greenfield investment or by acquiring or merging with a Finnish company. The business consultations consisted of senior executives’ answers to an online questionnaire and insights obtained from structured interviews. Investors’ observations are complemented by comments sought from other relevant Finnish stakeholders.

The findings from these consultations align with key messages emerging from other studies and business surveys described above, some of which have broader respondent samples than the present survey. The business consultations also offered some additional insights, for instance, regarding the benefits of foreign ownership. Acquisitions of domestic companies by foreign ones helped some Finnish businesses deal with pre-existing financial constraints, but the benefits are not limited to additional funding. Several companies reported that by leveraging the parent’s international experience, they were able to enter new foreign markets, launch new products and develop a longer-term vision with a more comprehensive business strategy that would provide new impetus for growth.

The chapter is structured as follows: first, before diving into survey and interview findings, it will give a brief overview of the methodology of the business consultations and describe the sample of respondents. An assessment of the drivers of FDI will then examine the foreign investors’ reported motivations for choosing Finland as an investment location. Subsequent sections will describe businesses’ views on a number of regulatory factors identified in Chapter 2 as potentially affecting foreign investors and foreign-owned businesses in Finland. These regulatory aspects are divided into thematic areas, covering factors related to setting up a business in Finland and affecting companies’ day-to-day operations. Dedicated sections will give insights on these businesses’ use of funding and incentive mechanisms available in Finland and future investment plans. Finally, the chapter will discuss the impacts of the COVID-19 outbreak on the respondents’ business operations.

4.2. Respondent’s profile

The objective in the selection of businesses for consultations was to build a representative group of respondents (see Box 4.1 for more details on the methodology used for the business selection). Indeed, the sample of businesses consulted is diverse in terms of activities, ownership, size and location. The sample involves both business-to-business and business-to-consumer firms active in ICT (23% of the survey respondents), clean-tech (23%), bio-circular economy (8%), health and life science (27%), professional services (12%) and transport sectors (8%). The sample includes small and large companies 7 located across several major Finnish cities: Helsinki, Espoo, Vantaa, Tampere and Turku.8

In terms of FDI type, companies that entered Finland through greenfield investment projects make up one-third of the sample. Two-thirds of respondents represent Finnish businesses acquired by or merged with a foreign company or private equity fund. Most of these M&A deals and greenfield projects took place during recent years. As for the origin of the foreign investors, in most cases the ultimate owner resides within the EEA, while 35% of the survey respondents represent businesses ultimately owned by non-EEA investors.9

Box 4.1. Methodology of the business consultations

Drawing from data on business transactions for cross-border M&A and greenfield investment projects, a set of foreign-owned companies in Finland, active in strategically important sectors,1 were identified. To obtain a broader picture of the regulatory obstacles that these businesses face in Finland, the industry selection included also sectors not covered in Chapter 2 of this report. To build a representative sample, the type of FDI, geographical coverage of foreign investors and locations in Finland were considered in the company selection.

Around 120 pre-selected firms were contacted by email and phone, with the aim of securing around 20 firms for business consultations, which consisted of an online questionnaire and structured interviews. All in all, 24 senior executives completed the online questionnaire and 23 of these business representatives gave a 60-minute interview. Responses to the questionnaire were collected and teleconference interviews were conducted in October 2020. Following consultations with Amcham Finland, additional five companies were asked targeted questions in short interviews that took place in January 2021, bringing the total number of interviewed businesses to 28.

The online questionnaire consisted of six sets of questions, gathering insights on the following topics: general information about the company, reasons for investing in Finland, impact of regulatory and policy factors in Finland, plans for future investment, use of financial incentives available in Finland, and past and expected effects of the COVID-19 pandemic. Responses to the online questionnaire were used to formulate targeted follow-up questions to obtain additional information during the interviews.

Although the sample is relatively small, the results of the questionnaire and interviews echo findings from recent surveys, some of them conducted with a larger pool of respondents.2 In addition to business consultations, comments from other relevant stakeholders, such as Finnish business associations and research institutes, were sought to complement company findings.

← 1. These strategically important sectors include ICT, bio-circular economy, clean-tech, health & life science, professional services, travel and tourism, transport, logistics, distribution and construction. Identified by the Finnish Government and Business Finland, these key industries were chosen due to their potential for attracting FDI into Finland.

← 2. See Amcham Finland and Business Finland (2020[1]), compiling 172 foreign affiliates and 231 Finnish international companies' views of Finland's business environment; Amcham Finland and Business Finland (2019[2]) with responses from 141 foreign affiliates and 112 Finnish international companies; National Audit Office (2017[3]) and Sunesen et al. (2019[4]), summarizing the results of interviews.

Many of the respondents actively engage in trade. Half of the firms generate at least one-quarter of their turnover by selling outside Finland. Sweden is one of the most important export destinations for nearly half the firms. Around 20% of survey respondents list Germany, Estonia and Norway as their key markets for foreign sales. The United States and the United Kingdom are among main export destinations for 13% of respondents. Sweden, Germany and the United States are also the most important sources of inputs.

The following sections give an overview of the results of the online questionnaire and highlight the most common concerns raised by businesses and other stakeholders during the interviews. Both the online questionnaire and the interviews with senior executives were structured around blocks of questions related to drivers of FDI, regulatory and policy obstacles, investment trends, incentives and the impact of the COVID-19 health crisis on companies’ activities. In the following sections, businesses' perspectives on each of these topics are described in more detail and complemented with comments from other stakeholders.

4.3. Drivers of FDI

4.3.1. Technology, knowledge and skills are the main drivers of FDI into Finland

Nearly all firms viewed technology, knowledge and skills as the leading drivers of their investment into Finland (Figure 4.1). Around 80% of businesses considered access to technology and knowledge as “very important” or “moderately important” to their decision to invest into Finland, whereas nearly all firms ranked access to a pool of skilled labour as highly important.10

Most businesses perceived these two drivers as complementary. Several investors saw their investment in Finland as an opportunity to develop new technologies or find synergies with the existing products, thanks to the Finnish technological expertise and highly skilled labour force. For instance, through the acquisition of a Finnish software company, one foreign firm specialising in radiation therapy was able to offer a more comprehensive approach to cancer treatment in the form of a software for treatment planning. A pharmaceutical company that entered the Finnish market about two decades ago to explore the possibilities offered by a specific Finnish invention indicated that skilled labour is the key reason why this company stayed and kept expanding its operations in Finland. One IT firm added that high digital literacy of the Finnish consumer was an important aspect of their decision to keep investing in Finland.

A few respondents mentioned that the “Nokia legacy” facilitated search for expertise needed to develop their R&D projects. In search for the right human capital for their R&D project, one IT firm was comparing multiple locations around the world and found the best expertise in Finland. Several firms perceived Finland’s salaries for high-skilled workers as competitive compared to other Nordics, which was an important factor for their location choice.11

Figure 4.1. Technology and skills are the main drivers of inward FDI

4.3.2. Market access attracts many foreign investors

Many firms identified access to the Finnish or neighbouring markets as a significant driver of their investment into Finland (Figure 4.1). Nearly half of the respondents targeted primarily the Finnish consumer. Several firms entered Finland to offer their existing products or services to the local customer, while some businesses wanted to use the Finnish market as a test bed for their new products. A few companies saw Finland as an opportunity to leverage their experience from the other Nordics.

Overall, firms entering via setting up new establishments rated access to the Finnish market as more important than businesses pursuing M&As. Except for one respondent, all consulted firms undertaking greenfield projects in Finland reported that access to the local market was important to their investment. In contrast, nearly one-third of investors entering via M&A mentioned that the Finnish market was not a factor in their decision-making process.

A few firms indicated that they entered Finland to gain access to the neighbouring markets. Some respondents use their Finnish site to export their goods and services to EU countries. A Chinese airline chose Finland as the country is on the shortest route between China and the European market. Access to the Russian and Baltic markets was particularly important for the firms in the transportation sector. Finland’s geographical location was essential to complement their international strategy.

4.3.3. Local partners, infrastructure and risk diversification drive some FDI into Finland

Other drivers were less often rated as essential to the investment decision. Linkages with local suppliers in Finland were very important for the investment decision of nearly 20% of respondents, mostly those undertaking greenfield projects (Figure 4.2). For instance, one clean-tech firm located its plant in Finland to get closer to its key supplier. Some respondents highly valued the importance of their partnership with Finnish firms. For instance, by merging with a local partner, one firm in real estate consulting was able to add project management and design services to its portfolio, which clients were increasingly asking for. One airline company from outside the EEA emphasised that the partnership with a local firm was crucial for learning about the Finnish customer and better understanding the local culture.

Firms in clean-tech and transport ranked access to physical infrastructure as important. Although digital infrastructure, such as broadband connection and communication services, was not a major driver of FDI, many firms highlighted its importance for their operations.

Figure 4.2. Other drivers of FDI into Finland

Access to raw materials is essential to several firms operating in the clean-tech and bio-circular segment. For instance, one company constructing a battery plant in western Finland will source nickel and cobalt from a refinery nearby. A foreign investor planning to build a pulp mill considers purchasing some inputs from the Finnish forest industry. Only two firms entering via setting up new establishments saw Finland as an opportunity to lower production costs. Both businesses were referring to the competitiveness of Finnish salaries for high-skilled workers.

Some firms reported that investing in Finland was a significant opportunity to diversify risks, for instance by exploiting the advantages offered by a larger customer and supplier base. Private equity companies added Finnish energy distributors to their portfolio, as these types of businesses, operating in very regulated markets, offered stable return on investment in the medium-long run.

4.4. Regulatory obstacles

This section reports companies and other stakeholders' perceptions on various aspects of the Finnish regulatory framework. Relying on the results of the online questionnaire and interviews, it highlights which potential barriers described in Chapter 2 of this report are, in fact, considered by businesses as obstacles to starting a company in Finland and to their everyday operations. Companies’ comments on these regulatory aspects are divided into five thematic areas: setting up a business, regulatory transparency and red-tape, attracting and recruiting talents from abroad, labour market regulation, and other regulatory issues. Views from other stakeholders provide additional insights into Finland’s business environment.

4.4.1. Very few difficulties setting up a business

The businesses consulted had not experienced significant regulatory obstacles related to setting up operations in Finland. Greenfield investors were, overall, more affected by these aspects than foreign companies entering the market via M&A. Nevertheless, processing times for registering a business in Finland were not viewed by foreign investors as an obstacle, and minimum capital requirements for public limited companies had not been a deciding factor in choosing the legal form of their Finnish establishment. The permit requirement for establishing a branch of a non-EEA foreign company was not seen as a particular obstacle, either, but it was noted that, without knowledge of the local language, the help of a local law firm was necessary to assist in the process of setting up the Finnish branch.

None of the cross-border M&A deals involving firms from outside the EEA reported with certainty being subject to the screening of foreign corporate acquisitions (as described in section 2.2.1). Businesses with non-EEA ownership had not bought real estate after the entry into force of the new rules for the screening of real estate acquisitions, either.

A few companies mentioned that foreign, non-EEA executives and board members experienced some difficulties setting up a bank account in Finland. Due to the lack of a common system for digital personal identification between Finland and the investor’s country of origin, non-resident investors may be required to visit the bank in person for identification. The heavy documentation required to open an account, for instance regarding the origin of funds, was also mentioned.12 Helsinki Business Hub, the international trade and investment promotion agency for the Finnish capital region, reported similar concerns dealing with Finnish banks, particularly from Russian investors.13 Nonetheless, steps have been taken to facilitate establishing a foreign company in Finland and improve the digital operating environment for businesses. For instance, a recent pilot project experimented with solutions that would allow a company representative abroad to digitally found a company in Finland.14

Although the firms did not report direct discrimination against foreign-owned companies or specific obstacles related to foreign ownership, some respondents perceived the general (business) environment in Finland as unwelcoming towards foreign companies and foreign professionals. One interviewed company perceived that, overall, foreign entrepreneurs in Finland have to be more proactive than Finnish ones when starting a business. Knowledge of the Finnish language makes it easier to take on all the steps required to set up a business, and the general expectation in Finland is that foreigners should strive to learn the local language. These cultural factors might put off foreign investors, although steps have been taken to improve the availability of information in English in recent years, for instance by Business Finland. Indeed, a number of respondents believed that further increasing the availability of administrative and regulatory information in English would facilitate setting up operations in the country. Some businesses saw potential in introducing a one-stop-shop for companies contemplating entering the Finnish market.

While difficult to measure, a perceived unwelcoming environment towards foreign businesses and professionals may have tangible consequences on foreign investment. Amcham Finland reports that certain businesses have considered leaving Finland due to their executives not getting their residence permits extended. Aspects related to residence permits are discussed in more detail in a following section. Recently, the COVID-19 pandemic has exposed how feasible remote working is in many lines of business, and some companies that are less tied to the local market hinted in interviews that they might consider relocating to a more welcoming country. Sweden was mentioned as being ahead of Finland in terms of openness to foreigners and in creating a favourable operating environment for foreign-owned companies.

4.4.2. Businesses call for a more predictable operating environment

Aspects related to regulatory transparency and red-tape did not represent important obstacles for most respondents (Figure 4.3). Many businesses either commended Finnish public authorities for their co-operation, smooth processes and good digital public services, or reported that they did not interact with public administration very often.

At the same time, several companies brought up obstacles related to regulatory transparency and red-tape that affect Finland’s general business environment. A number of respondents mentioned that Finland's approach to transposing EU directives may have negative effects on competitiveness (Box 4.2). Sudden changes in laws and regulations were the most commonly raised obstacle related to regulatory transparency and red-tape.15 Many respondents called for a more stable and predictable operating environment in Finland. A perceived lack of long-term vision in the government with respect to regulation, the business environment and FDI contributed to a general feeling of uncertainty.16

Corporate taxation and industry-specific regulation were mentioned as areas where businesses are particularly affected by unpredictable law-making. One respondent felt that discussion around tax reforms in Finland was “more politics than data-driven decision making”. Having to comply with frequent changes in tax rules, including fluctuations in the requirements needed to benefit from new tax deductions, was perceived as burdensome. Unstable industry regulation, in turn, can erode faith from investors especially in sectors where investment has a very long lifespan, such as energy infrastructure.

The issue of unpredictability was also raised in relation to the interpretation and execution of laws and regulations over time, particularly within the Tax Administration regarding some very specific topics. Transfer pricing, rules related to permanent establishment and acquisition-related advisory services costs 17 were mentioned as topics where companies had experienced unpredictable decision making.

Figure 4.3. Regulatory transparency and red-tape

Moreover, lack of coherence in regulation and implementation between municipalities as regards environmental and energy safety permits was brought up by some respondents. A few businesses also considered that obtaining an environmental permit, construction permit or approval of land-use plans takes a long time. These businesses would welcome further streamlining of these processes, particularly in fast-growing markets where companies cannot afford to wait a few years for the relevant permits.18 A survey carried out by the Confederation of Finnish Industries (EK) at the end of 2018 reveals that despite shorter processing times than in 2016, EUR 2.7 billion worth of investments were at a standstill due to pending permit processes. In 2018, the average processing time of an environmental permit was 15.5 months, and the typical difference between the fastest and slowest regional authorities in the processing of permits for investment projects was reported to be more than half a year.19 EK expects that in 2020, processing times have increased yet again due to COVID-19 lockdowns. The Finnish Government has recognised the importance of speeding up the processing of investment-related permits. A recent report explored the possibility to limit the processing times of these permits to 12 months, in particular through legislative means.20 In addition, lengthy appeal processes can further contribute to delays and increase risk for investors. For instance, the Administrative Court of Vaasa, where appeals against environmental permits are centralised, recorded an average processing time of 19.2 months in the category of environmental cases (including also other cases than appeals against permit decisions) in 2019.21

In EK's survey, SMEs had a more negative perception of permit procedures than large enterprises.22 Based on the business consultations, smaller foreign-owned companies also seem to struggle more with bureaucracy and understanding regulation in areas such as hiring employees from abroad, complying with a growing number of EU-driven standards, sector-specific heavy regulation and public procurement processes. Some of these aspects are discussed in more detail in the following sections.

Box 4.2. Strict approach in transposing EU legislation may bring additional costs to businesses

Several interviewed companies from different sectors brought up Finland's very diligent approach to transposing EU directives into national law. Indeed, according to the European Commission’s statistics, Finland and Latvia are the top performers in the Nordic-Baltic region in terms of transposition of Single Market directives. In Finland, the transposition deficit, measuring the share of directives that have not yet been transposed in relation to the total number of directives adopted by the EU, has mostly remained below the EU average since Finland joined the Union. At 0.1%, Finland’s transposition deficit is currently the lowest of all Member States. Moreover, when there are delays in transposition of directives into Finnish law, the average delay is the second lowest of all Member States.1

While regulatory harmonisation within the Single Market brings evident benefits for businesses (see section 2.5), the consulted companies were concerned that Finnish lawmakers tend to go beyond minimum requirements foreseen in directives when transposing them into national law (gold plating). Due to additional costs that over-regulation may impose on businesses, some respondents considered that Finland's competitiveness in the Single Market was not kept in mind when adopting additional requirements or that Finland could benefit from observing other Member States' implementation strategies before choosing its national approach. Similar views were expressed by business executives interviewed by the National Audit Office of Finland (NAO) in 2017.2 In its general overview of regulatory burdens in Finland, the Prime Minister’s Office also took notice of critiques regarding gold plating.3

However, it is difficult to quantify to what extent gold plating occurs and whether it represents a more significant obstacle to businesses and investors in Finland than elsewhere in the region. Nonetheless, OECD indicators show that there is room to further improve regulatory impact assessment in Finland (see section 2.2.4). Moreover, the NAO concluded in 2017 that there had been certain transparency-related shortcomings in the way Finland applies the flexibility offered to Member States to adapt their transposition efforts to national specificities.4 Finland’s national guidelines for legislative drafting were subsequently amended in 2019 to introduce a model structure for bills with an EU background, outlining how to address the national margin of manoeuvre. The new guidelines highlight the importance of regulatory impact assessment when planned provisions go beyond the minimum requirements of EU directives and urge to assess other Member States’ transposition efforts. In its 2020 follow-up evaluation, the NAO examined recent bills transposing directives into national law and found that seven out of the eight bills followed the structure prescribed in the new guidelines.5Moreover, the Ministry of Justice is revisiting the training of government officials in EU law and its national transposition.

← 1. European Commission, Single Market Scoreboard (2020), Performance per Member State: Finland, and Performance per governance tool: Transposition.

← 2. Business executives considered that stricter implementation of directives in Finland, as opposed to other EU countries, puts Finnish companies at a competitive disadvantage (National Audit Office, 2017, p. 33[3]).

← 3. Prime Minister's Office (2018, p. 128[5]).

← 4. The NAO found that bills did not always clearly indicate the national margin of manoeuvre offered by the directive, how the margin is applied in national transposition and what are the effects of its application, e.g. for the business community. The NAO also noted that it would be useful to describe in bills how other Member States apply the margin, although the simultaneous transposition efforts in different Member States complicate such an assessment. (National Audit Office, 2017[6]), pp. 34, 41, 44.

← 5. However, the scope of the NAO’s assessment did not cover the substance of these bills; for instance, whether the information presented in them as regards the national margin of manoeuvre was correct and sufficient. National Audit Office report D/1016/04.07.04/2020.

A number of respondents reported that, despite generally well-functioning public consultation mechanisms, policy makers' understanding of businesses’ needs and the impact of regulatory reforms on them could be improved. The secondary use of health and social data came up as an example of a policy area where Finland could benefit from engaging business stakeholders more actively. The scope and quality of Finnish health data, together with pioneering legislation for its use, represent a competitive advantage for the country, but stronger co-operation between the public and private sector are needed to stay ahead of the game, especially as Finland's peers are focusing their attention more actively on this topic.

Similarly, business executives interviewed by the National Audit Office in 2017 called for improving the dialogue between public authorities and companies in general, and interviewed authorities emphasised the importance of better contacts with foreign companies after they have invested in Finland.23 Steps have already been taken to facilitate interaction between Finnish policy makers and foreign investors in recent years. In order to provide a forum for discussion, a Meeting of Foreign Investors (formerly Investor Round Table and Foreign Investors Council) was set up in 2012 and assembles twice a year. Chaired by the Minister of Economic Affairs, the meetings allow a number of representatives from foreign-owned companies to exchange directly with the Ministry and other stakeholders.

4.4.3. Difficulties attracting and bringing in talents from abroad

Several companies, especially in the software industry, brought up skill shortages in the Finnish labour market, which hinder their ability to grow.24 Yet, many businesses reported administrative difficulties recruiting skilled workers from outside the EEA (Figure 4.4). Greenfield investors viewed these regulatory aspects as more important obstacles than foreign companies entering Finland through M&A.

The procedure for obtaining residence permits for foreign employees was perceived by many respondents as unnecessarily complex and time-consuming. Long processing times of residence permit applications add considerable delay to recruitment processes, which is not sustainable in industries with skill shortages or for projects on a tight schedule. A company in the IT sector recounted having to give up the recruitment of skilled professionals in some instances because "getting them to Finland was just too difficult". Difficulties bringing non-EEA staff from a group’s other locations abroad were also reported, despite the more streamlined permit process for intra-corporate transfers. Some companies which, until now, have recruited very few or no foreign workers at all, indicated that they would consider hiring (more) from abroad if the process was simplified.

It was also noted that the recruitment of foreign students completing a university or PhD degree in Finland should be facilitated to retain these talents in the country and mitigate local skill shortages. Currently, these students must apply for a residence permit extension upon graduation to remain in Finland and look for work and apply for a new residence permit on the basis of work once they have signed a job offer. The extended permit to look for work can be granted for a maximum of 12 months.25 A forthcoming proposal would extend this period to 24 months (see section 2.2.2).

Comments from other stakeholders echo these observations and underline the need to address skill shortages in view of Finland’s rapidly aging population. EK considers that recruiting foreign workers may be difficult for businesses and that Finland is not particularly attractive for foreign workers.26 The various residence permit types and processes may be difficult for applicants to navigate.27 Long processing times that exceed maximum delays imposed by legislation are reportedly a concern regardless of the residence permit type. The importance of streamlining the recruitment of foreign workers is also reflected in Amcham Finland and Business Finland's barometer, where facilitating labour availability from Finland and abroad was among businesses' top-4 wishes for the Finnish Government.28

Difficulties with employees' residence permits affect companies regardless of their ownership structure, whereas shortcomings in (start-up) entrepreneurs’ residence permit processes complicate the entry of business founders. According to Helsinki Business Hub, start-up entrepreneurs have raised many issues related to the residence permit procedure, in addition to long processing times. For instance, the duration of initial permits is relatively short and can vary among the team of start-up founders, and the criteria for permit renewal are unclear. In some instances, start-up founders have not been granted a residence permit due to insufficient financial resources, despite a positive eligibility statement from Business Finland regarding their business plan.29

Figure 4.4. Residence permits are the main obstacle to recruiting foreign talents

In addition to bureaucracy attached to recruiting foreigners, many interviewed businesses brought up factors that make it difficult to attract skilled foreign professionals to Finland and retain them. For instance, the high rates and heavy progression of personal income taxation were thought to decrease the country's attractiveness in the eyes of highly skilled specialists.30 Especially in Helsinki, the high cost of living in relation to salaries was mentioned to be a deterring factor. Moreover, some businesses felt that Finland lacks a long-term vision and clear strategy for attracting foreign talent. The general climate and political discourse around immigration in Finland were perceived as uninviting, whereas Sweden was mentioned as an example of a country that is better-known abroad for its welcoming attitude towards foreigners. One respondent even mentioned that some of their employees had left the country due to feeling isolated and not fully integrated in Finland. On the stakeholder side, Business Finland and Helsinki Business Hub have both observed foreign workers' difficulties obtaining residence permits for their family members.31

Several respondents believed that foreign talent would help companies established in Finland to grow and succeed internationally. Comments from Amcham Finland support this perspective and highlight that the scarcity of foreign talent in executive teams and boards may explain why the importance and added value of foreign talent is not yet widely understood. A recent study comparing listed companies in Finland, Denmark and Sweden finds that, on average, there are more foreign nationals in senior leadership in large Finnish companies (approximately 40%) than large Danish and Swedish companies (32% and 28%, respectively). However, large enterprises represent only 0.2% of Finnish companies, while SMEs make up for 6.8% of all companies.32 The shares of foreign talent in executive teams and boards are much lower in Finnish SMEs, 17% in mid-sized and 13% in small companies.33

Many measures have already been initiated in Finland to attract more international experts and promote better integration of foreign talent into the Finnish society. A cross-administrative Talent Boost programme seeks to make the country a more appealing destination to international talent and promotes measures that can help retain skilled foreign employees and international students in the Finnish labour market.34 In addition to various planned reforms of immigrant legislation and residence permit processes (see section 2.2.2), the programme proposes measures to further develop entry services for arriving international talent and Finnish/Swedish language training at workplaces, among others. Talent Boost also aims to help companies recruit international talent and tap into the expertise of these professionals to support growth, internationalisation and innovation of Finnish businesses. For instance, SMEs and companies with a group turnover up to EUR 300 million can apply for Business Finland’s Talent Explorer funding to recruit international experts.35

Supporting the Talent Boost objectives, a Working life diversity programme, launched in March 2021, seeks to reduce structural discrimination and racism in the Finnish labour market. It outlines an action plan to increase awareness of the benefits of diversity in workplaces, boost employers’ diversity skills and support the employment and career advancement of immigrants in Finland.36 Finally, a forthcoming report on integration policy maps out potential reform areas for promoting better integration of immigrants into the Finnish society.37

In business consultations, the requirement to give priority to Finnish or EU workers and the recognition of foreign qualifications were considered as less significant barriers to recruiting talents from abroad than shortcomings associated with the residence permits. Nonetheless, some respondents felt that limiting the entry of foreign professionals based on the availability of local labour force was unnecessary. In professional services sectors, lack of knowledge of the local language was reported to represent a bigger obstacle to hiring foreign talents than the process of getting non-EEA foreign qualifications recognised in Finland. In the case of construction-related activities, qualification requirements for building designers, specialist foremen and site managers were seen as a way to guarantee the special know-how required in Finnish winter conditions. In this context, the process for the recognition of foreign qualifications was rather a positive factor from the businesses’ point of view. Similarly, in maritime transport, seafarers’ local education and experience navigating the Finnish archipelago in wintertime were perceived as critical. Moreover, subsidies to reduce labour costs for EU/EEA crew members 38 do not encourage maritime passenger transport providers to hire non-EEA professionals.

Based on the business interviews, the requirement in Finnish law that at least one member of the board of directors and the managing director (CEO) reside within the EEA had not been an obstacle for foreign investors to appoint the leadership of their choice.

Following the COVID-19 outbreak and the transitions it has brought to workplaces, companies might increasingly take advantage of remote work practices to access foreign talents in the future, depending on the contract type.39 Nonetheless, not all sectors will be able to forego the physical presence of employees on-site.

4.4.4. Strict labour market regulation affects growth and internationalisation prospects

The rigidity of Finnish labour market regulation was the most commonly raised issue by the respondents. More than half of the consulted businesses perceived regulation related to hiring and firing, working hours and salaries, and labour taxation as very important or moderately important obstacles (Figure 4.5). Businesses entering the Finnish market via greenfield investment reported more concerns related to these aspects than companies pursuing M&A deals. Concerns that labour regulation negatively affects companies’ operating environment are also reflected in the results of Amcham Finland and Business Finland's FDI barometer, where the need for a more flexible labour market structure was one of the key messages from businesses.40

Many of the interviewed firms wished for more flexible hiring and firing procedures that would help them mitigate skill shortage in certain industries and take more risk in expanding their business. Letting an employee go (on grounds other than criminal offence) was described as very difficult; small firms mentioned not being able to afford the risk of recruiting someone who then cannot be fired due to stringent labour regulation, including when the new employee's performance is poor. Moreover, the necessary steps to lay off an employee were perceived as complex, costly and time-consuming. Some companies mitigate these inflexible labour market conditions by including trial periods in employment contracts 41 or by recurring to sub-contractors. Some respondents viewed labour market regulation in other Nordics as less restrictive, with Denmark's model repeatedly mentioned as the most attractive in terms of flexibility of hiring and firing.42

The rigidity of the labour market was thought to hinder the growth potential of companies and their internationalisation prospects, as well as the general competitiveness of Finland in relation to other countries in the region. A Finnish company acquired by a foreign MNE reported that domestic labour regulation makes it difficult for them to justify, at the group level, growing in scale by hiring more people in Finland. Another business recounted that if labour market conditions were more flexible, they would be more confident to adopt a less risk-adverse strategy and increase their headcount in Finland to expand abroad, instead of focusing mainly on the domestic market.

Figure 4.5. Many businesses see labour market regulation as an obstacle

In Finland, national and industry-specific collective agreements have traditionally had a strong impact on labour conditions. Negotiated by labour unions and industry federations, agreements are binding for all companies in a given industry.43 At the time of the business consultations, the Finnish Forest Industries Federation’s unexpected and historic decision to discontinue collective bargaining rekindled debate on the role of the national contract system. The Federation cited the different needs and situations of firms within the industry as one of the reasons for transitioning to company-level bargaining.44 In the first quarter of 2021, the Technology Industries of Finland announced the decision to withdraw from collective bargaining to promote workplace-level negotiations.45

Most companies interviewed would also welcome the possibility to negotiate labour conditions, such as working hours and salaries, on a local (company) level as an alternative to following the industry-wide collective agreements. While some smaller organisations might find negotiating labour conditions locally resource-intensive, the industry-level agreements were generally seen by respondents as inflexible and not accommodating for the wide differences among companies within the same industry.

Many companies perceived labour costs in Finland to be advantageous in comparison to those in other Nordics.46 However, the total cost of employment, including both employer and employee’s taxes, social security contributions and other expenses, was still considered too high by many respondents.

4.4.5. Other regulatory aspects

This section will focus on a number of other aspects in Finland's regulatory framework which, overall, held relatively little importance in the eyes of respondents. Nonetheless, some businesses raised concerns about these other regulatory aspects, most notably regarding difficulties accessing public procurement projects (Figure 4.6).

The businesses consulted had varying views on the Finnish public procurement process. Some had not experienced any particular difficulty participating in public tenders, while others perceived the procurement process as complicated and requiring special competences, factors that were thought to especially deter start-ups from selling to the public sector. Knowledge of the local language was considered necessary to submit bids, and some respondents found it challenging to access information on relevant projects. Moreover, one IT firm mentioned that some public tenders require the employees of the winning provider to speak Finnish, which decreases the attractiveness of tenders for companies with international teams.47 Companies that entered Finland through greenfield investment projects reported participation in public procurement as particularly problematic.

A few companies remarked that the cost-driven criterion for the selection of providers is not suitable to all types of purchases, such as professional services, where the quality of the service can have important and long-lasting effects on operations. Respondents providing professional services indicated that emphasis on cost, and consequently, low pricing of projects (as opposed to their valuation), discouraged them from bidding.48

Several businesses felt that some tenders are tailored for certain providers that the public buyer is already familiar with. One respondent remarked that smaller and less experienced purchasing entities tend to publish tenders tailored to certain participants. At the early stages of the COVID-19 pandemic in Finland, direct purchases based on emergency clauses and the purchasing of protective equipment by the National Emergency Supply Agency raised some transparency concerns, but these problems have since been addressed.49

Finland's relatively low corporate tax rate 50, with respect to those applicable in other Nordic economies, was seen as contributing positively to companies' operating environment. Further lowering personal taxation was thought to be important for attracting investment and creating a more dynamic market in Finland. One respondent expressed concerns about increasing levels of property taxation 51, while some companies hoped for additional tax incentives, for instance for highly skilled employees. Lower taxation was also number one on businesses' wish list for the Finnish Government in Amcham Finland and Business Finland's FDI barometer.52

As regards the effect of publicly owned enterprises on competition, businesses' viewpoints varied depending on the industry. On the one hand, in some industries, the presence of public companies was thought to potentially benefit private providers when public companies are not efficient in their operations (energy sector). On the other hand, public ownership was not considered beneficial. For instance, in the software industry, municipality-owned enterprises were perceived as distorting competition, while in the health sector, they were seen as limiting access to all parts of the supply chain.

In maritime transport, the obligation to use local piloting services provided by state-owned Finnpilot was not perceived as an obstacle. The selection of providers of logistics services at ports and airports was not considered to negatively affect competition, either, despite the lack of competitive bidding procedures for awarding certain types of service contracts (as discussed in section 2.3.5). On the contrary, the selection of providers in ports was thought to function well in both Finland and Sweden.

While a few businesses reported obstacles related to tariffs and customs procedures, these difficulties were characteristically related to aspects outside of Finnish policy makers' control. For instance, due to Norway not being party to the EU, goods shipped from Norway go through customs on arrival at the Finnish border, a process that was perceived as troublesome, time-consuming and expensive. Likewise, strict border restrictions enforced due to the COVID-19 pandemic in the shipping country affected businesses in Finland that sourced their inputs from there, while no additional bureaucracy was reported in the context of Finnish border controls.

4.5. Funding opportunities and incentives

Finland offers a variety of incentives and funding options to businesses, including foreign-owned companies. Among these: business aid from ELY Centres, employment services by TE Offices, R&D funding by Business Finland, capital investments from Finnish Industry Investment (Tesi), financing from Finnvera, tax deduction for educational costs of employees, accelerated tax depreciations for tax years 2020-23, and local support from cities. The survey respondents were asked whether they had any experience with the above-mentioned forms of support.

Business Finland's low-interest loans and grants for R&D projects were the most common incentive that respondents had taken advantage of. Several companies mentioned they had a smooth experience with the application process, good results from this form of support and commended the overall usefulness of Business Finland's other services for companies.53 Except for business aid from ELY Centres 54, the businesses interviewed had little to no experience with other incentives. A couple of companies had received non-financial support from cities, helping them with the processes involved in land acquisition, industrial site arrangement and developing physical infrastructure. This involvement at the local level was seen as particularly valuable.

At the same time, several companies reported difficulties accessing local funds, grants or subsidies. In some cases, the large size of the applicant's parent company or the condition that intellectual property rights (IPR) must remain in Finland prevented these companies from benefitting from R&D funding opportunities. However, Business Finland reports occasionally making project-specific exceptions to the IPR requirement, for instance, if the applicant increases its operations in Finland. These exceptions were also mentioned by some of the respondents.

A few businesses raised transparency concerns regarding funding decisions in Finland. They perceived that the lack of transparency was due to aspects such as changes in the eligibility criteria during the application process and unequal treatment of applicants in the selection of projects that would receive support. This finding is aligned with a study that identified discretionary investment incentives as one of the weaknesses of Finland’s incentive proposition, in relation to 14 peer countries. Awarding certain incentives on a discretionary, case-by-case basis was estimated to potentially result in perceived discrimination or arbitrariness and undermine investors’ confidence in Finland’s incentive policies.55

Moreover, several respondents felt that the funding available in Finland is too focused on innovation, R&D and start-ups, while funding for the commercialisation of innovations, such as marketing 56, is lacking. Companies’ wishes for other forms of support also included subsidies for large investments (such as first industrial deployment and infrastructure), funding adapted for multi-stage, large investment projects that would consider a candidate’s track-record of successful completion of previous stages, and more performance-based, industry-specific initiatives (video game industry).

The previous absence of fiscal R&D incentives in Finland to complete R&D funding propositions was perceived as a relative weakness in a comparative study by Investment Consulting Associates, as many other countries have adopted this type of incentive.57 However, in an effort to further boost the R&D activities of both domestic and international companies operating in Finland, new legislation in force as of 1 January 2021 allows companies to make an additional tax deduction for costs of R&D work sub-contracted to EU/EEA research organisations in tax years 2021-25. Together with the existing 100% deduction, the additional 50% deduction brings the total deductibility of qualifying R&D costs to 150%. The additional deduction can amount to up to EUR 500 000 per year.58 Among the other Nordic and Baltic countries, Denmark, Lithuania, Norway and Sweden also offer fiscal R&D incentives, but the mechanisms vary between countries.59

4.6. Investment trends

Over the next three years, most investors are planning to expand their operations in Finland. Some firms reported that growing demand for their products or services prompts their expansion plans, and many saw opportunities for entering new product markets. Several firms are also planning to expand in other Nordic countries and the rest of the EU. One in four companies interviewed is considering expansion outside the European market.

One clean-tech firm that is not planning to expand in Finland but considering investment in the Baltics and the rest of the EU, explained that the main reasons for doing so included difficulties with foreign recruitment, tough competition and lack of predictability in industry regulation.

Many firms considered M&A as their primary expansion strategy, indicating that it is often faster to acquire an existing business with a well-established footprint. Indeed, several businesses referred to M&A as a cost-efficient way to exploit an existing customer base, market knowledge and established links with local suppliers. One IT firm added that entering a new country by acquiring a local firm allows starting with a larger team, which is essential for establishing customers’ trust. A few businesses saw M&A as an opportunity to mitigate skill shortage. However, for some respondents, M&A was not an option due to the specificity of their business or the lack of suitable targets, particularly for brand-new products or services.

4.7. Impact of COVID-19

The COVID-19 pandemic affected consulted businesses along multiple dimensions. Although some companies experienced major disruptions in their operations, many businesses were able to mitigate the repercussions of the health crisis due to resilient risk management strategies or favourable demand in some market segments.60

Revenues of many respondents fell as a consequence of reduced demand from consumers and businesses (Figure 4.7). A number of firms saw no change in income, as growth in some market segments offset the fall in others. However, several firms experienced an upward trend in their revenues. As many people stayed at home, the demand for renovation materials boosted sales of one firm in the bio-circular segment. The soaring demand for digital products benefitted some IT businesses. A few pharmaceutical companies were able to offer COVID-19 tests to their customers, which positively influenced their income. Most respondents expected these trends in revenues to persist until the second quarter of 2021.

Figure 4.7. The different impact of COVID-19 on business activity

Nearly half of the firms experienced a decline in their costs, largely driven by the drop in travel and office maintenance expenses and, in some cases, by layoffs. Costs of many respondents were unaffected, yet several firms saw their expenses rise. For instance, labour costs of one clean-tech firm went up, as their business typically relies on foreign sub-contractors, but had to resort to more expensive Finnish workforce due to the travel restrictions. Several companies faced additional shipping costs due to the disruptions imposed by the pandemic in their source countries.

Availability of finance remained unchanged for the majority of the respondents and most of them expect it to remain unchanged over the upcoming months. However, some firms struggled with securing the necessary funding. For instance, a small IT firm mentioned that the travel ban compromised their chances of meeting with potential investors.

Foreign sales of many Finnish-based businesses stayed flat and are expected to follow the same trend. Yet, exports of some companies fell sharply. Several health-tech firms indicated that the global demand for their products dropped, as the health concerns that their products addressed were considered less essential during the pandemic.

Most businesses reported no change in worker productivity. In the interviews, many companies indicated that they were able to quickly adapt to remote work. However, several respondents were concerned that teleworking stifled their ability to interact and innovate. Some companies expect workers’ productivity to decline over time as most employees get tired of new remote working conditions.

One in three companies reported a decline in total employment. A few businesses had to lay off people in response to a worsening of their finances. However, the total headcount of most businesses was unaffected by the pandemic. Some firms, mostly in the IT and health sectors, expanded their workforce to meet the growing demand for their products and services induced by the health crisis.

Businesses were also asked to what extent the pandemic affected their investment plans in Finland and abroad for 2020-21. One in two reported no change (Figure 4.8). Around 20% of firms foreshadowed a substantial decrease to their investment plans. A couple of companies reported increase in their investment plans – an advertising firm and a pharmaceutical company offering COVID-19 tests.

Figure 4.8. Many firms kept their investment plans unchanged

The COVID-19 pandemic prompted foreign investors to revisit their productions strategies, supply chains, and destination markets (Figure 4.9). More than one-third of respondents considered adopting automation, 3D printing or similar technologies to cut costs. One firm providing consulting services on real estate mentioned that travel bans and lockdown measures urged them to increasingly use augmented reality technologies to showcase properties to their customers.

Rethinking supply chains was perceived as important by many firms. Around one-third of respondents viewed diversifying suppliers across multiple countries as crucial. One in four businesses considered switching to suppliers closer to Finland. Increasing the number of source countries and export destinations was equally important to some firms.

Several companies indicated that they were able to mitigate the disruptive effects of COVID-19 with a timely response strategy. A few health-tech businesses accumulated large stocks of supplies already in the early stages of the pandemic.One clean-tech firm, sourcing its inputs primarily from Asia, mentioned that their risk management strategy was to have a back-up supplier for every input; even if switching suppliers took time, this practice proved successful in securing their inputs and avoiding penalties from not delivering in time.61 Changing suppliers was not possible for some firms due to the specificities of their production process.

Shifting production from foreign sites to Finland (i.e., nearshoring), decreasing the number of source countries or destination markets, or closing foreign establishments were less common strategies among the respondents.

The actions that the Finnish Government undertook up to October 2020 to mitigate the crisis and support businesses received mixed feedback. While justified for health reasons, restrictions to movement and physical meetings to curb the spreading of the virus disrupted operations for many businesses. Some respondents felt that better co-operation with businesses could have facilitated the government’s response to the COVID-19 pandemic. One IT company perceived that their offer to use 3D printers to produce medical supplies was not considered by the government. Another IT firm thought that a closer dialogue with multinational businesses could have allowed the government to learn from the way these multinationals engaged with foreign governments to tackle the adverse effect of the pandemic. Overall, most respondents viewed government intervention positively, which corroborates the findings of a survey carried out by EK in June 2020.62

However, some companies expressed concerns over how the financial aid was distributed.63 For example, one health-tech firm found that the eligibility criteria for government funding favoured firms with continuous revenue flows, putting at disadvantage businesses with longer production cycles. In fact, as the pandemic unfolded, this firm lost most of its orders but losses did not materialise until later in the year. When aid eligibility was decided, the firm was still cashing in the revenues associated with shipments done in the previous year and therefore did not qualify for support. Several firms questioned the sectoral distribution of those that benefitted from state aid or the rationale behind funding businesses that were struggling even before the health crisis. A few respondents were concerned about transparency over the awarding process.

4.8. Conclusions

This chapter has focused on foreign investors' views on Finland as an investment location and its general operating environment. By describing the results of a survey administered to business executives and a series of interviews, it has provided a business perspective on drivers of FDI into Finland and regulatory aspects that affect investors entering the country and the day-to-day operations of foreign-owned businesses.

In line with other recent studies and surveys, the results of the business consultations show that access to technology, knowledge and a pool of skilled labour are important factors that attract FDI into Finland. Access to the Finnish or neighbouring markets was also a significant motivation behind many investment decisions. Linkages with local suppliers were a central consideration in some investment decisions, particularly greenfield projects.

The findings of consultations indicate that foreign investors have a positive view of several important aspects of the Finnish business environment. In general, interactions with public authorities were perceived as relatively smooth. Setting up operations in the country was easy for most respondents, and the consultations did not reveal specific obstacles related to foreign ownership or direct discrimination against foreign-owned companies.

However, the surveyed businesses highlighted several regulatory aspects that influence all companies operating in the country, irrespective of their ownership structure. Rigid labour market conditions and labour taxation were the most commonly raised regulatory obstacles. A high level of bureaucracy attached to sourcing talent from abroad also hindered companies' ability to mitigate skill shortages in the Finnish labour market and expand their business both domestically and internationally. Moreover, business executives called for the streamlining of various permit procedures and a more predictable operating environment as regards changes to laws and regulations, among other topics. A number of companies also reported difficulties accessing funding, grants or subsidies, despite a range of incentives already available for businesses operating in Finland.

Finally, this chapter has also presented an overview of the consulted businesses' future investment plans and the impact of COVID-19 on their operations. Most of the respondents reported planning to expand their operations in Finland over the next three years, many of them citing M&A as their primary expansion strategy. Despite the COVID-19 pandemic disruptions to the operations of most interviewed businesses, half of them anticipated no change in their investment plans in Finland nor alternations of their value chains as a result of the pandemic.

Based on the findings of the business consultations and previous parts of this report, the following chapter will provide concluding remarks and a set of policy considerations that could improve Finland's overall business climate and contribute to attract even more FDI into the country.

References

[1] Amcham Finland and Business Finland (2020), Future Finland: Towards the Ideal Business Location. Finland as a Business Location 2020 Barometer.

[2] Amcham Finland and Business Finland (2019), Finland as a business location, https://amcham.fi/wp-content/uploads/2019/03/Finland-as-a-Business-Location-Barometer-Report.pdf.

[9] Berghäll, E. (2017), “Knowledge Spillovers, the Technology Frontier and High-Tech FDI - Evidence from Finland”, Finnish Economic Papers, Vol. 28/1.

[26] Confederation of Finnish Industries (2020), “Experiences of international business leader’s on Finland’s management of the COVID-19 crisis. EK survey to international business leaders living in Finland”, https://ek.fi/wp-content/uploads/EK-survey_Finlands-COVID-19-crisis-management.pdf.

[14] EIB (2020), EIB Group survey on investment and investment finance 2020. Country overview: Finland, https://www.eib.org/en/publications/flip/eibis-2020-finland/#p=3.

[13] EIB (2019), EIB Group survey on investment and investment finance 2019. Country overview: Finland, https://www.eib.org/attachments/efs/eibis_2019_finland_en.pdf.

[24] EY (2020), “Worldwide R&D Incentives Reference Guide”, https://www.ey.com/en_gl/tax-guides/worldwide-r-and-d-incentives-reference-guide-2020.

[18] Halttula, S. and S. Saikkonen (2021), “Nordic Business Diversity Index. Diversity of senior leadership in Nordic listed companies”, https://findix.fi/uploads/1/2/4/4/124448646/nordicbusinessdiversityindex_2021.pdf.

[11] Investment Consulting Associates (2016), Investor Incentives Research Report.

[23] Jääskeläinen, J. and J. Tukiainen (2019), “Anatomy of public procurement”, VATT Working Papers, Vol. 137.

[7] Ministry of Economic Affairs and Employment (2021), Working life diversity programme. Action plan to promote diversity of working life from the perspective of immigration and integration, https://julkaisut.valtioneuvosto.fi/handle/10024/162933.

[8] Ministry of Economic Affairs and Employment (forthcoming), Selonteko kotoutumisen edistämisen uudistamistarpeista.

[3] National Audit Office (2017), Encouraging business investments: Overall assessment.

[10] National Audit Office (2017), Encouraging business investments: Views of four sectors..

[6] National Audit Office (2017), EU-lainsäädännön täytäntöönpano.

[27] OECD (2020), OECD Economic Surveys: Finland 2020, OECD Publishing, Paris, https://dx.doi.org/10.1787/673aeb7f-en.

[20] OECD (2020), OECD Employment Outlook 2020: Worker Security and the COVID-19 Crisis, https://doi.org/10.1787/19991266.

[19] OECD (2019), “Detailed description of employment protection legislation”, https://www.oecd.org/els/emp/All%202019.pdf.

[28] OECD (2019), Negotiating Our Way Up: Collective Bargaining in a Changing World of Work, OECD Publishing, Paris, https://dx.doi.org/10.1787/1fd2da34-en.

[29] OECD (2018), OECD Economic Surveys: Finland 2018, OECD Publishing, Paris, https://dx.doi.org/10.1787/eco_surveys-fin-2018-en.

[15] OECD (2018), Skills for Jobs. Finland country note, https://www.oecdskillsforjobsdatabase.org/data/country_notes/Finland%20country%20note.pdf.

[25] OECD (forthcoming), “Building resilience in global supply chains for all”.

[16] Paavola, J., R. Rasmussen and A. Kinnunen (2020), “Talent Attraction and Work-related Residence Permit Process Models in Comparison Countries”, Publications of the Government’s analysis, assessment and research activities..

[12] Prime Minister’s Office (2020), Effective permit procedure for investments within the set time limit, https://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/162222/VNTEAS_2020_29.pdf?sequence=1.

[5] Prime Minister’s Office (2018), Evaluating and reducing regulatory burdens, Publications of the Government’s analysis, assessment and research activities.

[22] SAK (2020), Collective agreements, https://www.sak.fi/en/working-life/agreements/collective-agreements.

[4] Sunesen, E. et al. (2019), World Class Ecosystems and Competitive Business Environment Impact Study.

[21] Työsuojelu (2020), Collective agreement, https://www.tyosuojelu.fi/web/en/employment-relationship/collective-agreement.

[17] Yrittäjät (2019), Finland cannot be renewed without enterprise., https://www.yrittajat.fi/sites/default/files/sy_esittely2019_en-gb.pdf.

Notes

← 1. For instance, Berghäll (2017[9]) presents evidence of technology sourcing as a motive for FDI in Finland. The importance of Finnish technological expertise and strong public-private-academia co-operation for the investment location choice was also brought up in the business consultations discussed in Sunesen et al. (2019[4]) and National Audit Office (2017[10]).

← 2. Access to highly-qualified labour force, close collaboration between universities and industry, and strong research infrastructure appear to be especially important for foreign-owned firms competing on global markets (Sunesen et al., 2019[4]; National Audit Office, 2017[10]). However, some surveys find that foreign investors in Finland experience shortage of skilled labour force (Amcham Finland and Business Finland, 2019[2]; Amcham Finland and Business Finland, 2020[1]).

← 3. Amcham Finland and Business Finland (2019[2]), Sunesen et al. (2019[4]).

← 4. Amcham Finland and Business Finland (2019[2]), Amcham Finland and Business Finland (2020[1]).

← 5. National Audit Office (2017[10]).

← 6. Investment Consulting Associates (2016[11]).

← 7. Half of the survey respondents have 49 of less employees in Finland, 35% of consulted businesses employ between 50 and 249 people, 4% employ between 250 and 499 workers, and the headcount of the remaining 12% is above 500 employees.

← 8. Most of the survey respondents are located in Helsinki (46%), followed by Espoo (19%), Tampere (15%), Turku (12%) and Vantaa (8%).

← 9. Examples of non-EEA ultimate investors include Australia, Canada, China, and the United States.

← 10. Employee skill level was also rated as highly important by foreign affiliates in Amcham Finland and Business Finland (2020, p. 10[1]); Amcham Finland and Business Finland (2019[2]); and in National Audit Office (2017, pp. 28,38[3]). Yet, a growing skill shortage in knowledge-intensive sectors reportedly hinders the ability of some foreign (and domestic) businesses to expand their operations in Finland, as is further discussed in section 4.4.3.

← 11. Both the “Nokia legacy” and competitiveness of Finnish salaries were also mentioned as important triggers of inward FDI flows in the business interviews conducted by Sunesen et al. (2019[4]).

← 12. EU-level legislation requires Member States to impose customer due diligence requirements on banks in an effort to prevent money laundering and terrorist financing. These rules have been transposed into national law across the Nordic-Baltic region. See Directive (EU) 2018/843 (5^th anti-money laundering Directive).

← 13. Many foreign entrepreneurs from Russia, but also other non-EU/EEA countries, have reportedly seen their Finnish bank accounts closed without warning, or they have not been able to open an account at all. While anti-money laundering and terrorist financing regulations serve valid purposes, they might have some unwanted consequences for legitimate clients. Caution against Russian clients is reportedly related to the economic sanctions imposed by the EU on a number of Russian individuals and companies. See Helsingin Sanomat, 13 January 2021 and 19 January 2021. Similar concerns about account closures have been raised by Russian clients in the Baltics (see Novaya Gazeta, 27 February 2020). One possible reason why the difficulties of Russian investors reportedly appear in Finland and the Baltics, but less so in other parts of the region, is the greater presence of Russian clients due to historic ties and geographical proximity to these countries.

← 14. The pilot made use of a digital identity and an electronic identification token created for the company representative and the company itself, allowing for the registration of a company electronically. Thanks to secure transmission of private and public company data between organisations, the representative could also hire a local accounting firm for the new company without needing to re-enter details on different operators’ forms. Finnish Tax Administration press release, 29 October 2020.

← 15. Unpredictability of public decision-making in Finland was also brought up by business executives in an audit undertaken by the National Audit Office, benchmarking Finland as an investment location against Denmark, Sweden and the Netherlands (National Audit Office, 2017, p. 57[3]).

← 16. Political decision-making was also perceived as a challenge, rather than opportunity, in Amcham Finland and Business Finland (2020, p. 20[1]).

← 17. Finnish legislation does not contain specific rules on the tax treatment of advisory costs. Whether these costs are allocated to the company or its owners has been addressed in the Tax Administration’s decision-making practice and legal precedents. See the Tax Administration’s guideline (VH/5697/00.01.00/2019, in force as of 1 January 2020).

← 18. The National Audit Office also concluded that slow land use planning and building permit processes constitute an obstacle to investments, and that “unbureaucratic“ land use planning would give Finland a competitive advantage over peer economies (National Audit Office, 2017, p. 32[3]).

← 19. Confederation of Finnish Industries, Permit survey results (January 2019), p. 10, and Press release, 31 January 2019.

← 20. Proposed lighter models for regulating processing times could entail requiring the permit authority to assess and actively communicate estimated processing times to applicants. Alternatively, amendments to legislation on different environmental permits could introduce time limits for the processing of permits, enforced by penalties imposed on authorities for exceeding these legal limits (Prime Minister’s Office, 2020[12]).

← 21. Annual report of the Administrative Court of Vaasa (2019), Figure 7, p. 12. The duration of judicial proceedings, in general, has sparked some critique in Finland. Yle, 17 January 2020.

← 22. Confederation of Finnish Industries, Permit survey results (January 2019), p. 8.

← 23. National Audit Office (2017, pp. 19,70[3]).

← 24. Both foreign and domestic firms often cite the growing skill shortages in the Finnish labour market as a substantial obstacle to growth (EIB, 2019[13]; EIB, 2020[14]; Amcham Finland and Business Finland, 2020[1]). According to the occupational shortage indicator (based on the estimated mismatch between the skills sought by employers and the pool of potential recruits, as detailed in OECD (2018[15])), the ICT sector in Finland faces stronger occupational shortages than in other Nordic-Baltic economies: the estimated mismatch of nearly 0.6 is slightly larger than in Norway (0.5), Sweden (0.5) and Lithuania (0.4), but is significantly stronger than in Estonia (0.2), Latvia (0.2) or Denmark (0.1).

← 25. Finnish Immigration Service, Residence permit application for extended permit to look for work or to start a business, consulted 21 January 2021.

← 26. Confederation of Finnish Industries (EK), Work-based immigration, consulted 22 December 2020.

← 27. According to a comparative study, Finland has 23 different work-based residence permits for non-EU/EEA applicants. Denmark has 18 work-related permit types, while Sweden only has 2. Norway's numbers are not readily available, but the authors estimate that the number of permit types is smaller than in Denmark (Paavola, Rasmussen and Kinnunen, 2020[16]).

← 28. Amcham Finland and Business Finland (2020, p. 21[1]).

← 29. The rationale behind the law is that typically, early-stage start-up founders may direct profits towards maintaining and further developing the business, rather than paying themselves a salary. Hence, founders may need other financial resources. The threshold of sufficient financial resources is currently set at EUR 1 000 per month. Bill for amendments to the Aliens Act (HE 129/2017 vp), p. 24. Finnish Immigration Service, Residence permit application for a start-up entrepreneur, consulted 22 December 2020.

← 30. In comparison with other countries in the region, Finland applies higher marginal tax rates to above-average earners than Norway and the Baltic countries. In Sweden and Denmark, these marginal tax rates are higher than in Finland. OECD, Marginal personal income tax and social security contribution rates on gross labour income (2019). However, Finland has introduced a special tax scheme for foreign key employees that earn a monthly salary of at least EUR 5 800. These key employees are subject to a flat tax rate instead of the progressive regime that applies to other employees (see chapter 2, section 2.2.2).

← 31. At nine months, the maximum delay allowed by law for the processing of a family member’s residence permit application is significantly longer than for the foreign employees themselves (four months). However, according to Migri, when a foreign employee and a family member apply for residence permits simultaneously, the applications are processed together and both decisions are given at the same time. Aliens Act (301/2004), Section 69 a, and Finnish Immigration Service, Processing times, consulted 23 December 2020. Moreover, the scarcity of English language school places in the capital region reportedly represents a practical challenge for foreign talents migrating to Finland with their family.

← 32. According to Yrittäjät (2019[17]), 93% of Finnish companies are micro enterprises.

← 33. Halttula and Saikkonen (2021[18]). The study defines the size of companies with respect to their market capitalisation on Nasdaq Nordic in 2020. Large Cap companies have a market value exceeding EUR 1 billion, Mid Cap between EUR 150 million and 1 billion, and Small Cap below EUR 150 million. Nasdaq press release, 17 December 2020.

← 34. Ministry of Economic Affairs and Employment, Talent Boost programme, consulted 8 April 2021.

← 35. Business Finland, Talent Explorer funding, consulted 8 April 2021. See also other services provided by Business Finland in the context of the Talent Boost programme.

← 36. Ministry of Economic Affairs and Employment, Working life diversity programme. Action plan to promote diversity of working life from the perspective of immigration and integration (2021[7]).

← 37. Ministry of Economic Affairs and Employment, Selonteko kotoutumisen edistämisen uudistamistarpeista (forthcoming[8]).

← 38. In the case of passenger ships engaged in regular maritime services moving passengers between EU ports, aid under the so-called “seafarers’ scheme” is only granted with respect to labour costs arising from the vessel’s EU and EEA citizen crew members. Act on Improving the Competitiveness of Vessels engaged in Maritime Transport (1277/2007), Section 10 (2).

← 39. In the case of employment contracts, rules on labour market testing might nonetheless require that no suitable Finnish or EU/EEA labour force is available for the position in order for the employer to recruit from outside the EU/EEA.

← 40. Amcham Finland and Business Finland (2020, p. 21[1]).

← 41. The maximum duration of trial periods allowed by law was lengthened from 4 to 6 months in 2017. Employment Contracts Act (55/2001), Section 4, amendment in force as of 1 January 2017. Businesses mentioned having used this possibility of longer trial periods when hiring new employees. In Sweden and Norway, the maximum length of trial period is also 6 months. In Denmark, it ranges from 9 to 12 months depending on the collective agreement in place (OECD, 2019[19]).

← 42. For instance, one measure where Finland appears more restrictive than other Nordic-Baltic countries and many OECD economies relates to dismissals for personal reasons. In Finland (and also in Sweden), unsatisfactory performance, without unsuitability, is not considered a fair reason for a dismissal, contrary to what happens in many OECD economies, including Denmark and Estonia. Furthermore, to fire a worker for personal reasons in Finland, the employer is required to first offer the worker another chance by transferring him/her to another position; a stricter requirement than in most OECD countries (OECD, 2020[20]). When it comes to dismissals on economic grounds, many OECD economies impose some requirements on employers. Finland requires the employer to give priority for rehiring to the dismissed worker if the next candidate has similar qualifications. In contrast, about one-third of OECD countries, including Denmark, impose no conditions for individual dismissals for economic reasons (OECD, 2020[20]). Furthermore, in Finland, most collective agreements are generally binding for the whole industry, irrespective of whether a business belongs to the employers’ organisation (Työsuojelu, 2020[21]; SAK, 2020[22]). This is different from other Nordics, where the general applicability of collective bargaining rules depends on the employer's status with respect to the employers’ association.

← 43. In Finland, nearly 90% of employees are covered by collective agreements; a much higher share than in most EU countries. The collective agreement coverage is also high in other Nordics (90% in Sweden, 82% in Denmark and 73% in Norway), while it is below 20% in the Baltic economies (OECD, 2020[27]). Until recently, the national-level collective bargaining was widespread in Finland, whereas it played a smaller role in other Nordics; in the Baltics, bargaining primarily takes place at a company level (OECD, 2019[28]). The new wage bargaining model in Finland, initially proposed alongside the Competitiveness Pact, implies that the country is moving towards an industry-level model, which is expected to introduce more flexibility to the Finnish labour market (OECD, 2018[29]). However, even under industry-level wage bargaining, employers have little power to adjust wages to firm-specific conditions. Although industry-level collective agreements allow negotiating some aspects on a company level, this flexibility is available only for members of the employer association that signed the agreement, which constitute a little over 20% of business employers in Finland (Yrittäjät, 2019[17]). The planned efforts of the Finnish Government to increase the scope of local-level agreements could help reduce labour market costs, including for non-members. Ministry of Economic Affairs and Employment, 18 February 2020.

← 44. Yle, Forest industry under fire for decision to quit collective bargaining, 1 October 2020.

← 45. Technology Industries of Finland, Press release, 6 April 2020.

← 46. Indeed, the estimated average hourly cost of labour in Finland (EUR 34.0) is lower than in Norway (EUR 50.2), Denmark (EUR 44.7) and Sweden (EUR 36.3). However, hourly labour costs are yet considerably lower in Estonia (EUR 13.4), Latvia (EUR 9.9) and Lithuania (EUR 9.4). Eurostat, Estimated hourly labour costs (2019).

← 47. Knowledge of Finnish or Swedish may be included as a criterion relating to the professional qualifications of tenderers or as another type of requirement in the public procurement of services to ensure that the service purchased can be delivered in both national languages. Ministry of Economic Affairs and Employment, Opinion of the Ministry of Justice concerning the application of the Language Act (432/2003) and the Act on the Openness of Government Activities (621/1999) to public contracts, consulted 25 January 2021.

← 48. Jääskeläinen and Tukiainen (2019[23]) found that public procurement in Finland suffers from a lack of genuine competition, with most tenders attracting 0-2 bids. The lack of competition results both from a lack of potential entrants, and potential entrants not submitting bids.

← 49. A report looking into the Agency’s purchasing of protective equipment concluded that purchasing had not been made according to legislation and internal rules. National Emergency Supply Agency press release, 14 April 2020.

← 50. Finland's corporate tax rate of 20% compares favourably to three other Nordic countries: Denmark and Norway, at 22%, and Sweden, at 21.40%. Estonia and Latvia apply a similar 20% tax rate, while Lithuania is the only country in the comparator group that applies a lower corporate income tax rate (15%) than Finland. OECD member countries: Corporate and capital income taxes (2000-20), April 2020.

← 51. The real estate and construction sector has reported concerns about frequent changes in property taxation during the past decade. Uncertainty regarding the effects of a planned, but postponed, property tax reform is also thought to have a negative impact on the investment environment in Finland. RAKLI ry press release, 13 January 2021. The reform is intended to take effect in 2023, but a bill introducing it has not yet been issued. Ministry of Finance, consulted 21 January 2021.

← 52. Amcham Finland and Business Finland (2020, p. 21[1]).

← 53. As part of Business Finland, the country’s investment promotion agency Invest in Finland offers a wide range of advisory services to companies planning to enter Finland, from market entry strategy to match-making. One respondent mentioned that these services were very helpful in making the Finnish system transparent, while another considered that Business Finland’s support had facilitated obtaining residence permits for the company’s foreign personnel.

← 54. ELY Centres provide advisory, training and expert services and grant funding for investment and development projects. See ELY Centre, Business and industry, consulted 6 January 2021. One respondent specified that re-skilling services for employees was a very useful form of support provided by the ELY Centres. A comparative study benchmarking Finland’s incentive proposition to those of peer economies found that the technical assistance and aftercare offered by ELY Centres represented a competitive advantage for the country. Out of the 14 countries covered in the study, only Finland and Poland offered this type of ”soft incentives” which facilitate setting up operations and expansion (Investment Consulting Associates, 2016, p. 30[11]).

← 55. No similar element of discretion was found in the other Nordic countries’ incentive offering. Although less flexible than case-by-case mechanisms, pre-defined eligibility criteria for incentives and automatic eligibility for all applicants fulfilling the criteria would improve the predictability and transparency of incentive decisions (Investment Consulting Associates, 2016, pp. 31-32[11]).

← 56. The National Audit Office (2017, pp. 49-52[3]) reports that Finland lags behind peer economies in marketing skills and, consequently, Finnish companies are relatively unsuccessful in the consumer market and e-commerce. It recommends allocating more product development funding to the commercialisation of innovations.

← 57. Among the 14 peer economies considered in the report, Finland was found to be one of the few countries that only offered R&D grants (EY, 2020[24]). Finland did offer an additional tax deduction for R&D labour expenses in years 2013-14, but the seemingly unsuccessful scheme was then discontinued. Bill for the Act on an additional tax reduction for research and development activities in tax years 2021-2025 (HE 196/2020), p. 4.

← 58. Act on an additional tax deduction for research and development activities in tax years 2021-2025 (1078/2020). See also Business Finland news release, 18 December 2020.

← 59. Similar to Finland, Lithuania offers a so-called super-deduction of 300% of qualifying R&D costs . In Denmark, businesses can currently deduct 105% of R&D costs, with the percentage set to rise to 108% for years 2023-25 and again to 110% from 2026. In Norway, R&D costs are deductible, with an additional fiscal incentive amounting to 19% of costs. Sweden does not offer an additional deduction for R&D costs, but businesses can take advantage of a deduction for R&D related labour expenses. HE 196/2020, pp. 11-12.

← 60. Consultations with firms and business associations in other OECD countries also highlight the importance of flexible risk management strategies and favourable demand for minimizing the consequences of disruptions (OECD, forthcoming[25]).

← 61. Sufficient safety stocks of goods and the ability to find alternative suppliers were also highlighted in the interviews discussed in OECD (forthcoming[25]).

← 62. Confederation of Finnish Industries (EK) (2020[26]).

← 63. The reported findings refer to the first round of business cost support. Successive rounds took place after the business consultations. State Treasury, 3 May 2021.

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