Multinational Corporations in a Local Perspective – the Case of Varkaus in Finland

Multinational Corporations in a Local Perspective –

the Case of Varkaus in Finland

Prof Raimo Lovio

Helsinki School of Economics

The message of the paper

• In favorable circumstances local business units may have surprising power vis-à-vis multinational companies

• Multinational companies lose a significant amount of knowledge base and innovation potential if they fail to use knowledge available in their local units =

think locally, act globally

The proportion of foreign-owned enterprisesof Finnish enterprises

The position of foreign-owned enterprises has become stronger in Finland during the 1994 to 2002 period. In 2002 the proportion of turnover was 17.5 per cent.

The effects of foreign acquisitions in Finland?

• Foreign ownership has primarily had a positive influence on the profitability and productivity of the acquired enterprises

• It has changed the management style of the acquired companies

• Some concern is related to the R&D investments and growth perspectives of the acquired enterprises

• The effects of foreign acquisitions have been mainly studied on the corporate level, therefore focus in the paper is on the level of local business units

Varkaus case in a nutshell

• Small industrial company-town with 23 000 inhabitants in eastern Finland, first industrial units established in the 1850s

• Ahlström Ltd continued invest in its factories in Varkaus up until the 1980s: a sawmill, pulp mill, four paper machines, three engineering units (steam boilers, pulping equipment, screen plates), process automation unit, etc. employees over 3 000

• Between 1985 – 2002 all units were sold to international companies

Pulp, Paper and Printing 11.12. 2002 3

Kansainvälinen automaatiokeskusKansainvälinen automaatiokeskus

• Tuotteet:– Prosessiautomaatio

– Radanvalvonta

– Vianilmaisu

– Sensorit

• Toimialat:– Selluteollisuus

– Paperiteollisuus

– Graafinen teollisuus

• Toimipaikat:– Varkaus

– Jyväskylä

– Kuopio

Following the change in ownership, the links of the business units in Varkaus with the global economy were altered

• The historical emotional ties disappeared

• The companies turned from builders of the town into tenants

• From domestic family ownership to foreign stock markets

• The significance of the units in Varkaus in the business of the new owners is very small, when compared to Ahlström’s times

• From owners of a diversified company to owners of companies with a clear focus

New owner Country of origin

Employees

total

Employees

in Varkaus

Business

Stora Enso Finland and Sweden

45 000 1 350 pulp & paper

Hartmann Denmark 2 000 50 egg cartons

Foster Wheeler

USA 10 000 550 energy technology

Andritz Austria 4 500 300 pulp technology

AFT Canada 1 000 150 screen plates

Honeywell USA 115 000 400 industrial automation

Tellabs

(a new unit)

USA 7 000 15 telecommunications

New owner Business Development Strenghth Weakness

Stora Enso pulp & paper no growth Large integrated unit

Long distance, somewhat old systems

Hartmann egg cartons no growth in Finland competitive cost structure

in other countries non-competitive c.s.

Foster Wheeler

energy technology

growth technology, engineering

non-competitive cost sturucture in production

Andritz pulp technology

no growth technology a minor advantage

non-competitive cost sturucture in production

AFT screen plates growth technology and production

competitive only in Europe

Honeywell industrial automation

lots of ups and downs

applications in paper, pulp and graphical ind

credibility in a huge major company

Tellabs

(a new unit)

telecommunications

new R&D unit closed

knowhow in embedded information systems

only additional unit

Honeywell unit in Varkaus

• Idea of the acquisition was to buy a competing product off the market and replace it with its own product (technology transfer from the center to periphery)

• Surprise: customers were not interested; the Finnish original product back to production, secret development work started in customer projects

• Competition: three competing products in Honeywell, difficult situation

• Honeywell bought Measurex: new possibilities to Varkaus unit because of Measurex’s marketing channels and of a new unit in Kuopio, in Finland

• Honeywell was in financial difficulties: it was first acquired by the American Allied Signal and after that merger negotiations started with GE: due to the quest for profitability the unit in Kuopio was closed down and its product was sold

• New thinking in Honeywell when the merger with GE did not happen:

– new customer-based structure, new role for Varkaus unit as a developer for platforms in its strong application industries

– the product of Kuopio unit was reacquired

– a new R&D unit was relocated from USA to Finland to develop new sensor systems for different industrial applications in the paper industry but also in some others

• These developments are leading to technology transfer from periphery to the center

Lessons

• Local units may have strong and surprising cumulative knowhow due to historical and other reasons and they may have tacit advantages in keeping this knowhow accurate

• Difference between generic (technology driven) R&D and specific (customer driven) R&D

• Credibility of local units in head offices, capital cities and mainstream studies is often low: local units have to be active in showing their capabilities