Foreign Capital and Finland : Central government's first period of reliance on international financial markets, 1862-1938

The main objective of the study is to evaluate the Finnish central government s foreign borrowing between the years 1862 and 1938. Most of this period was characterised by deep capital market integration that bears resemblance to the liberal world financial order at the turn of the millennium. The main aim is to analyse the credit risk associated with the state and its determination by evaluating the world financial market centres perception of Finland. By doing this, the study is also expected to provide an additional dimension to Finland s political and economic history by incorporating into the research the assessments of international capital markets regarding Finland during a period that witnessed profound political and economic changes in Finnish society. The evaluation of the credit risk mainly relies on exchange-rate risk free time series of the state s foreign bonds. They have been collected from quotations in the stock exchanges in Helsinki, Hamburg, Paris and London. In addition, it investigates Finland s exposure to short-term debt and Moody s credit ratings assigned to Finland. The study emphasises the importance of the political risk. It suggests that the hey-day of the state s reliance on foreign capital markets took place during last few decades of the 19th century when Finland enjoyed a wide autonomy in the Russian Empire and prudently managed its economy, highlighted in Finland s adherence to the international gold standard. Political confrontations in Finland and, in particular, in Russia and the turbulence of the world financial system prevented the return of this beneficial position again. Through its issuance of foreign bonds the state was able to import substantial amounts of foreign capital, which was sorely needed to foster economic development in Finland. Moreover, the study argues that the state s presence in the western capital markets not only had economic benefits, but it also increased the international awareness of Finland s distinct and separate status in the Russian Empire and later underlined its position as an independent republic.

Essays on Finnish Economic Growth and Productivity, 1860-2005

This study examines Finnish economic growth. The key driver of economic growth was productivity. And the major engine of productivity growth was technology, especially the general purpose technologies (GPTs) electricity and ICT. A new GPT builds on previous knowledge, yet often in an uncertain, punctuated, fashion. Economic history, as well as the Finnish data analyzed in this study, teaches that growth is not a smooth process but is subject to episodes of sharp acceleration and deceleration which are associated with the arrival, diffusion and exhaustion of new general purpose technologies. These are technologies that affect the whole economy by transforming both household life and the ways in which firms conduct business. The findings of previous research, that Finnish economic growth exhibited late industrialisation and significant structural changes were corroborated by this study. Yet, it was not solely a story of manufacturing and structural change was more the effect of than the cause for economic growth. We offered an empirical resolution to the Artto-Pohjola paradox as we showed that a high rate of return on capital was combined with low capital productivity growth. This result is important in understanding Finnish economic growth 1975-90. The main contribution of this thesis was the growth accounting results on the impact of ICT on growth and productivity, as well as the comparison of electricity and ICT. It was shown that ICT s contribution to GDP growth was almost twice as large as electricity s contribution over comparable periods of time. Finland has thus been far more successful as an ICT producer than a producer of electricity. Unfortunately in the use of ICT the results were still more modest than for electricity. During the end of the period considered in this thesis, Finland switched from resource-based to ICT-based growth. However, given the large dependency on the ICT-producing sector, the ongoing outsourcing of ICT production to low wage countries provides a threat to productivity performance in the future. For a developed country only change is constant and history teaches us that it is likely that Finland is obliged to reorganize its economy once again in the digital era.

Country-scale carbon accounting of the vegetation and mineral soils of Finland

The increase in global temperature has been attributed to increased atmospheric concentrations of greenhouse gases (GHG), mainly that of CO2. The threat of severe and complex socio-economic and ecological implications of climate change have initiated an international process that aims to reduce emissions, to increase C sinks, and to protect existing C reservoirs. The famous Kyoto protocol is an offspring of this process. The Kyoto protocol and its accords state that signatory countries need to monitor their forest C pools, and to follow the guidelines set by the IPCC in the preparation, reporting and quality assessment of the C pool change estimates. The aims of this thesis were i) to estimate the changes in carbon stocks vegetation and soil in the forests in Finnish forests from 1922 to 2004, ii) to evaluate the applied methodology by using empirical data, iii) to assess the reliability of the estimates by means of uncertainty analysis, iv) to assess the effect of forest C sinks on the reliability of the entire national GHG inventory, and finally, v) to present an application of model-based stratification to a large-scale sampling design of soil C stock changes. The applied methodology builds on the forest inventory measured data (or modelled stand data), and uses statistical modelling to predict biomasses and litter productions, as well as a dynamic soil C model to predict the decomposition of litter. The mean vegetation C sink of Finnish forests from 1922 to 2004 was 3.3 Tg C a-1, and in soil was 0.7 Tg C a-1. Soil is slowly accumulating C as a consequence of increased growing stock and unsaturated soil C stocks in relation to current detritus input to soil that is higher than in the beginning of the period. Annual estimates of vegetation and soil C stock changes fluctuated considerably during the period, were frequently opposite (e.g. vegetation was a sink but soil was a source). The inclusion of vegetation sinks into the national GHG inventory of 2003 increased its uncertainty from between -4% and 9% to ± 19% (95% CI), and further inclusion of upland mineral soils increased it to ± 24%. The uncertainties of annual sinks can be reduced most efficiently by concentrating on the quality of the model input data. Despite the decreased precision of the national GHG inventory, the inclusion of uncertain sinks improves its accuracy due to the larger sectoral coverage of the inventory. If the national soil sink estimates were prepared by repeated soil sampling of model-stratified sample plots, the uncertainties would be accounted for in the stratum formation and sample allocation. Otherwise, the increases of sampling efficiency by stratification remain smaller. The highly variable and frequently opposite annual changes in ecosystem C pools imply the importance of full ecosystem C accounting. If forest C sink estimates will be used in practice average sink estimates seem a more reasonable basis than the annual estimates. This is due to the fact that annual forest sinks vary considerably and annual estimates are uncertain, and they have severe consequences for the reliability of the total national GHG balance. The estimation of average sinks should still be based on annual or even more frequent data due to the non-linear decomposition process that is influenced by the annual climate. The methodology used in this study to predict forest C sinks can be transferred to other countries with some modifications. The ultimate verification of sink estimates should be based on comparison to empirical data, in which case the model-based stratification presented in this study can serve to improve the efficiency of the sampling design.

Essays on Stock Option Compensation and the Role of Incentives and Risk (summary section only)

Managerial pay-for-performance sensitivity has increased rapidly around the world. Early empirical research showed that pay-for-performance sensitivity resulting from stock ownership and stock options appeared to be quite low during the 1970s and early 1980s in the U.S. However, recent empirical research from the U.S. shows an enormous increase in pay-for-performance sensitivity. The global trend has also reached Finland, where stock options have become a major ingredient of executive compensation. The fact that stock options seem to be an appealing form of remuneration from a theoretical point of view combined with the observation that the use of this compensation form has increased significantly during the recent years, implies that research on the dynamics of stock option compensation is highly relevant for the academic community, as well as for practitioners and regulators. The research questions of the thesis are analyzed in four separate essays. The first essay examines whether stock option compensation practices of Finnish firms are consistent with predictions from principal-agent theory. The second essay explores one of the major puzzles in the compensation literature by studying determinants of stock option contract design. In theory, optimal contract design should vary according to firm characteristics. However, in the U.S., variation in contract design seems to be surprisingly low, a phenomenon generally attributed to tax and accounting considerations. In Finland, however, firms are not subject to stringent contracting restrictions, and the variation in contract design tends, in fact, to be quite substantial. The third essay studies the impact of price- and risk incentives arising from stock option compensation on firm investment. In addition, the essay explores one of the most debated questions in the literature, in particular, the relation between incentives and firm performance. Finally, several strands of literature in both economics and corporate finance hypothesize that economic uncertainty is related to corporate decision-making. Previous research has shown that risk tends to slow down firm investment. In the fourth essay, it is hypothesized that firm risk slows down growth from a more universal perspective. Consistent with this view, it is shown that risk not only tends to slow down firm investment, but also employment growth. Moreover, the essay explores whether the nature of firms’ compensation policies, in particular, whether firms make use of stock option compensation, affects the relation between risk and firm growth. In summary, the four essays contribute to the current understanding of stock options as a form of equity incentives, and how incentives and risk affect corporate decision-making. By this, the thesis promotes the knowledge related to the modern theory of the firm.

Essays on Corporate Governance and the Quality of Disclosed Earnings: Across Transitional Europe

A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

When sharing becomes a liability: An intellectual capital approach to describing the dichotomy of knowledge protection versus sharing in intra- and interorganizational relationships

The tension created when companies are collaborating with competitors – sometimes termed co-opetition - has been subject of research within the network approach. As companies are collaborating with competitors, they need to simultaneously share and protect knowledge. The opportunistic behavior and learning intent of the partner may be underestimated, and collaboration may involve significant risks of loss of competitive edge. Contrastingly, the central tenet within the Intellectual Capital approach is that knowledge grows as it flows. The person sharing does not lose the knowledge and therefore knowledge has doubled from a company’s point of view. Value is created through the interplay of knowledge flows between and within three forms of intellectual capital: human, structural and relational capital. These are the points of departure for the research conducted in this thesis. The thesis investigates the tension between collaboration and competition through an Intellectual Capital lens, by identifying the actions taken to share and protect knowledge in interorganizational collaborative relationships. More specifically, it explores the tension in knowledge flows aimed at protecting and sharing knowledge, and their effect on the value creation of a company. It is assumed, that as two companies work closely together, the collaborative relationship becomes intertwined between the two partners and the intellectual capital flows of both companies are affected. The research finds that companies commonly protect knowledge also in close and long-term collaborative relationships. The knowledge flows identified are both collaborative and protective, with the result that they sometimes are counteracting and neutralize each other. The thesis contributes to the intellectual capital approach by expanding the understanding of knowledge protection in interorganizational relationships in three ways. First, departing from the research on co-opetition it shifts the focus from the internal view of the company as a repository of intellectual capital onto the collaborative relationships between competing companies. Second, instead of the traditional collaborative and sharing point of departure, it takes a competitive and protective perspective. Third, it identifies the intellectual capital flows as assets or liabilities depending on their effect on the value creation of the company. The actions taken to protect knowledge in an interorganizational relationship may decrease the value created in the company, which would make them liabilities.

Knowledge Transfer within Western Multinationals' Subsidiary Units in China and Finland - The Impact of Headquarter Control Mechanisms, Subsidiary Location and Social Capital (summary section only)

It is suggested that the ability and practices of how the multinational corporation (MNC) manages knowledge transfer among its geographically dispersed subsidiary units are crucial for the building and development of firm competitive advantage. However, cross-border transfer of valuable organizational knowledge is likely to be problematic and laborious, especially within diversified and differentiated MNCs. Using data collected from 164 western multinational companies’ subsidiary units located in China and Finland, this study aims to investigate cross-border knowledge transfer within the MNC. It explores a number of factors that influence the transfer of knowledge among units in the differentiated MNC. The study consists of five individual papers. Paper 1 investigates a range of organizational mechanisms that may positively influence a subsidiary’s propensity to undertake knowledge transfers to other parts of the corporation. Paper 2 explores the impact of subsidiary location on the motivational dispositions of knowledge receiving units to value and accept knowledge from subsidiaries located in economically less advanced countries. Paper 3 examines the influence of social capital variables on knowledge transfer in dyadic relationships between foreign-owned subsidiaries and their sister and patent units. Paper 4 provides some initial insights into potentially different effects of trust and shared vision in intra-organizational vs. inter-organizational relationships. Using a case study setting, Paper 5 explores means and mechanisms used in transferring human resource management practices to Western MNCs’ business units in China from a cultural perspective. The results of the study show that MNC management through choices regarding organizational controls can encourage and enhance corporate-internal knowledge transfer. It also finds evidence that more knowledge is transferred from subsidiaries located in an industrialized country (e.g., Finland) than subsidiaries located in a developing country (e.g., China). While the study has highlighted the importance of social capital in promoting knowledge transfer, it has also uncovered some new findings that the effect of trust and shared vision may be contingent upon different contexts. Finally, in Paper 5, a number of mechanisms used in transferring selected HRM practices and competences to the Chinese business units have been identified. The findings suggest that cultural differences should be taken into consideration in the choice and use of different transfer mechanisms.

Worksite Fitness Policy in an Intellectual Capital Framework

In a framework of Intellectual Capital (IC), the effects and interactions of a Worksite Fitness Program (WFP) policy was studied with a multidisciplinary approach. In a preliminary study, indicators for physical activity (PAI), physical fitness (PFI), activity in WFP on a regular (WFPI) and on a events basis (WFPE) were created in line with positive findings regarding the associations between physical activity and fitness patterns and sick leave, perceived health, and self-assessed work ability. The intensity of physical activity was found to be the most important variable to predict positive associations with the above mentioned wellness parameters. In four case study follow-up settings, the effects and interactions of physical activity and fitness patterns and the company’s WFP-policy on different elements of IC were studied. Qualitative methods were applied in constructing indicators and a descriptive IC measure for each case company. In cross-sectional and follow-up settings, several findings with respect to IC were found regarding physical activity in general and activity in WFP in particular. Findings were relatively strong in health and wellness related indicators in Human Capital, where, as also in Structural Capital indicators such as the company climate and employee-superior relationship, revealed positive associations. Physical activity patterns were found to act in minor role in Relational Capital. Overall, WFP was seen to be an integrated part of Structural Capital. From the viewpoint of Worksite Fitness Program as a phenomenon, this study positioned WFP as an active element of Intellectual Capital. The literature in the field of WFP emphasizes the role of WFP as an instrument to activate employees in physical activity, and thus promote their health and wellbeing. With the wider perspective the active and long range WFP policy can support a company’s Structural and Relational Capital in line with the fundamental role it has on Human Capital.

Strategic Priorities, Company Performance and Attitudes Towards Management Accounting Techniques: an Empirical Study

The study investigates whether there is an association between different combinations of emphasis on generic strategies (product differentiation and cost efficiency) and perceived usefulness of management accounting techniques. Previous research has found that cost leadership is associated with traditional accounting techniques and product differentiation with a variety of modern management accounting approaches. The present study focuses on the possible existence of a strategy that mixes these generic strategies. The empirical results suggest that (a) there is no difference in the attitudes towards the usefulness of traditional management accounting techniques between companies that adhere either to a single strategy or a mixed strategy; (b) there is no difference in the attitudes towards modern and traditional techniques between companies that adhere to a single strategy, whether this is product differentiation or cost efficiency, and c) companies that favour a mixed strategy seem to have a more positive attitude towards modern techniques than companies adhering to a single strategy

The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions

This paper examines the potential impact of new capital requirements on asset allocations of Finnish pension institutions. We describe the new requirements and consider portfolio construction to minimize regulatory capital, given the investor’s preferred level of expected return. Results identify portfolio transactions that enhance expected return without increasing capital needs. Regulation calls for portfolio diversification and prudence in management, but this paper shows that market participants can exploit inconsistencies in regulation. Possible future consequences include capital outflows from the pension system and an unintended decrease in pre-funding of old-age pensions.

Inventory Routing - A Strategic Management Accounting Perspective

This dissertation develops a strategic management accounting perspective of inventory routing. The thesis studies the drivers of cost efficiency gains by identifying the role of the underlying cost structure, demand, information sharing, forecasting accuracy, service levels, vehicle fleet, planning horizon and other strategic factors as well as the interaction effects among these factors with respect to performance outcomes. The task is to enhance the knowledge of the strategic situations that favor the implementation of inventory routing systems, understanding cause-and-effect relationships, linkages and gaining a holistic view of the value proposition of inventory routing. The thesis applies an exploratory case study design, which is based on normative quantitative empirical research using optimization, simulation and factor analysis. Data and results are drawn from a real world application to cash supply chains. The first research paper shows that performance gains require a common cost component and cannot be explained by simple linear or affine cost structures. Inventory management and distribution decisions become separable in the absence of a set-dependent cost structure, and neither economies of scope nor coordination problems are present in this case. The second research paper analyzes whether information sharing improves the overall forecasting accuracy. Analysis suggests that the potential for information sharing is limited to coordination of replenishments and that central information do not yield more accurate forecasts based on joint forecasting. The third research paper develops a novel formulation of the stochastic inventory routing model that accounts for minimal service levels and forecasting accuracy. The developed model allows studying the interaction of minimal service levels and forecasting accuracy with the underlying cost structure in inventory routing. Interestingly, results show that the factors minimal service level and forecasting accuracy are not statistically significant, and subsequently not relevant for the strategic decision problem to introduce inventory routing, or in other words, to effectively internalize inventory management and distribution decisions at the supplier. Consequently the main contribution of this thesis is the result that cost benefits of inventory routing are derived from the joint decision model that accounts for the underlying set-dependent cost structure rather than the level of information sharing. This result suggests that the value of information sharing of demand and inventory data is likely to be overstated in prior literature. In other words, cost benefits of inventory routing are primarily determined by the cost structure (i.e. level of fixed costs and transportation costs) rather than the level of information sharing, joint forecasting, forecasting accuracy or service levels.