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How green is the valley? Foreign direct investment in two Norwegian industrial towns.

Depuis le debut des annees 1900, les investissements directs d l'etranger (IDE) ont grandement marque la societe norvegienne, notamment dans les communautes peripheriques. Cet article presente une analyse de la facon dont les entreprises transnationales (ETN) exploitent le territoire y compris le niveau local. Il tente aussi d'expliquer comment la relation complexe entre les entreprises et les espaces depend des attributs propres aux ETN et des caracteristiques de l'economie locale. Un courant important de la litterature etudie les nombreuses incidences et repercussions des ETN, comme les relations d'offre verticale et les effets indirects. Cependant, les discussions qui s'ensuivent presentent generalement peu d'explications d'ordre theorique concernant les resultats. La litterature associe les resultats positifs ou negatifs directement aux conditions locales et aux motivations qui poussent une entreprise d placer ses capitaux dans un IDE. Elle aborde a peine la question sur comment les resultats peuvent varier selon les types d'entreprises, de communautes et d'economies nationales, et comment ces interactions produisent des resultats differents. En conclusion, nous rappelons que les IDE disposent de plusieurs possibilites de transformer un milieu. Un investissement peut produire une dependance au sentier qui accentue la soumission quand le capital economique domine, et une dependance au sentier qui accentue le developpement quand il offre un equilibre entre le capital economique, les reseaux sociaux et le savoir. Une analyse empirique permet de relever cette variation qui caracterise les incidences des IDE. Elle porte sur deux villes moyennes industrielles situees dans la partie occidentale de la Norvege. La premiere est riche en ressources naturelles tandis que l'autre est dotee de ressources technologiques intangibles.


The process of globalisation increases the importance of foreign ownership in the operation of firms and makes foreign direct investment (FDI) an interesting subject for the analysis of local development. The literature discussing FDI has focused on how local conditions and motives behind FDI form local effects (Young et al. 1994; Dunning 1995, 1998; Amin and Cohendet 1999; Nachum and Keeble 1999). FDI generates different local effects, such as vertical supply linkages, spin-offs, knowledge spillovers and welfare effects. These effects vary according to both general economic, regulative and political national conditions and place-specific conditions and the underlying motives of FDI. Further, these factors and market conditions may change over time.

The FDI literature demonstrates that interaction between FDI and local conditions can be generalised to generate two main types of outcome (Giarratana et al. 2003). By the term outcome, we understand the collective result and effects of an event. The first outcome may be labelled FDI as development. This characterises a situation in which there are extensive local effects of FDI, such as vertical linkages, knowledge spillovers, spin-offs, innovation networks and technology transfer. The second outcome may be labelled FDI as dependency. This is a situation in which the local effects of FDI are restricted to employment in subsidiaries, taxes and some vertical supply linkages.

Theoretical explanations of outcomes are harder to grasp. The literature links positive as well as negative outcomes to local conditions and to investment motives of the entity making the FDI, but says little about the type of FDI and the interactions that generate FDI as development or FDI as dependency. In this article, we develop a model to address this issue. We argue that FDI consists of economic capital, networks and knowledge that, when interacting with given local conditions, can generate different forms of dependency or development. In an analysis of two Norwegian industrial towns, the usefulness of this model is examined. The analysis aims to explain:

* the history of FDI in these industrial towns;

* the local effects that are generated by the FDI;

* the interaction between the characteristics of the FDI, local conditions and local effects.

In the next section, we develop a model for analysing the outcomes of FDI. The third and fourth sections analyse the two cases. This is followed by a discussion, where we relate our findings to the existing literature and the theoretical debate regarding outcomes of FDI.

Theoretical Approach

FDI: not only capital

FDI is mainly related to subsidiaries of transnational corporations (TNCs). Some subsidiaries duplicate the production of the parent company, some produce components included in other products produced by the parent company and others are responsible for products that are totally unrelated to the parent company's products (Rumelt 1974). Foreign subsidiaries differ according to their positions in the value chain within the group, and this affects the stability of local investment. Traditionally, the FDI of TNCs was characterised by the dispersal of activities that had initially been conceived, tested and developed at the headquarters of the TNC. Decentralisation of production among various locations was a way of reducing transaction costs and of utilising scale economies and the skill advantages of these locations. The dominant element in this FDI was economic capital in the form of technology and machinery.

More recent contributions have analysed large firms, including subsidiaries of TNCs created by FDI, as complex knowledge environments, not simply as processors of contract-based informational transactions (Amin and Cohendet 1999). The management of large firms can no longer rely solely on the accumulation of competence in a given location. Shorter product life-cycles, rapid technological change and increased competition require multinational firms to delegate a greater variety of functions and more responsibility to the plant level, allowing plants to respond rapidly to changes and to utilise and build up local competence (Morris 1992; Nahapiet and Ghoshal 1998; O'Donnell 2000). FDI enables TNCs to take advantage of local knowledge, but the expertise of TNCs, both in terms of technology and modes of organisation, also represents a potential for local learning and innovation in processes that include local firms. Managers of subsidiaries of TNCs are dependent on specific resources. The headquarters can offer some of these, but resources important to performance are to a large extent linked to the subsidiary's relationship to customers, suppliers and local partners. Thus, in addition to capital, FDI also consists of social networks and knowledge.

Local effects of FDI

Local effects of FDI have traditionally been measured as job creation and local purchases of goods and services (Dunning 1993). FDI often tends to generate vertical local linkages. These linkages facilitate the establishment of local suppliers heavily dependent on TNCs for sales revenue. However, Andersson and Forsgren (1996) argue for a shift in the understanding of TNC-related FDI. FDI should not be understood as the source of a branch-plant economy that has mainly backward supply linkages to the regional economy (Watts 1981; Phelps 1992). Rather, there is a need to emphasise the flow of knowledge and competence generated by FDI in a region (Ivarsson 1999). Finally, business conditions and firm strategies are influenced by complex commercial/regulative explanations and changing market conditions.

New research on competence and organisational learning focuses on the ability of firms at all levels to acquire new knowledge from the environment, assimilate that information and apply it commercially (Nahapiet and Ghoshal 1998). Very often, FDI provides TNCs with local linkages to the competence and technology of local firms (Dunning 1995), while the spillover effects of FDI may be the diffusion of competence and skill from the foreign firm to economic agents in the region (Ivarsson 1999). In general, it is claimed that FDI benefits the local economy when TNCs fully exploit economies of scale and scope. This means that TNCs and their subsidiaries adjust more quickly than domestic firms to changes in technology and demand (Dunning 1993; Young et al. 1994).

Empirical studies indicate that spillover effects vary between firms, sectors and regions. Young et al. (1994) distinguish between the diffusion of technology, the creation of new firms and demonstration effects on suppliers, customers and competitors. Bellandi (2001) argues that close ties between the subsidiaries of TNCs and local firms are most likely to develop when the local production culture is neither 'too weak' nor 'too strong'. Borensztein et al. (1998) note that FDI contributes to economic growth, but only when the local economy is sufficiently able to absorb the advanced technologies introduced by FDI. Studies have also pointed out that subsidiaries that become over-embedded in their local or regional networks may be viewed as 'captives' by the headquarters. They may lose credibility within the organisation and be cut off from the future flow of technology and competence (Porter 1990; Taggart and Hood 1999).

In addition, characteristics related to TNCs and their subsidiaries affect the extent of local linkages. Dicken et al. (1994) emphasise that regional linkages differ not only between regions and companies, but also within companies. Global activities with important relationships outside the region may be combined with activities dominated by short-distance business relationships. Andersson et al. (2002) find that when subsidiaries are engaged in selling, purchasing and networking with external economic agents, the adaptation of resources occurs on both sides. This stimulates collective innovation projects. Ghoshal and Bartlett (1988) claim that higher levels of local autonomy facilitate local innovation. The motive for FD! is also important for the extent of local linkages. Market-seeking investment--i.e., the establishment of subsidiaries in markets abroad for better access to the customer or to avoid trade restrictions and investment motivated by access to natural resources--often generates limited spillover effects for local economies. On the other hand, investing in a foreign country to obtain access to technology and competence often generates more complex local linkages (Giarratana et al. 2003). Further, when explaining these processes one should be aware of different economic and regulative conditions. Much of the classical international FDI literature has been based on empirical evidence from large Western capitalist economies (Firn 1975; Marshall 1979; Birkinshaw and Hood 1998). This article argues that conditions for FDIs in Norway as in other Nordic countries or elsewhere may be somewhat different.

Towards a model

The preceding discussion has demonstrated that, in addition to economic capital, FDI also involves the creation of social networks, knowledge and goodwill engagements (such as supporting sporting clubs and cultural events). We have also seen that interaction between FDI and the local economy has been given a more prominent role in the discussion (Andersson et al. 2001). Traditionally, it has been claimed that the relationship between FDI and local conditions generates two different outcomes (Giarratana et al. 2003). One, which may be termed 'FDI as development', characterises a situation in which there are extensive local effects of FDI, such as vertical linkages, knowledge spillovers, spin-offs, innovation networks and technology transfer. The second outcome, which may be termed 'FDI as dependency', characterises a situation in which the local effects of FDI are restricted to employment in subsidiaries, taxes and some vertical supply linkages.

However, empirical studies and related theories say little about what kind of interactions create different development and dependency outcomes. Much of the existing FDI literature focuses either on local processes or on the motives of the entity making the FDI, and fails to address how both the content of the FDI and the interaction between FDI and local conditions affect the outcomes. Thus, in this study, we emphasise the role of local history and institutions, as well as the nature of the FDI, in explaining local effects. According to the tradition of evolutionary economics, economic activity is characterised by a certain degree of path dependency (Nelson and Winter 1982; Dosi et al. 1992). Economies develop along pathways or trajectories: 'the condition of the industry in each time period bears the seeds of its condition in the following period' (Nelson and Winter 1982). The history of a local production system and the industrial culture of an area provide new investors, such as TNCs, with both possibilities and limitations. The concept of path dependency involves a procedural understanding in which historical events have long-lasting consequences for the economy. In most cases, new investment has only a limited effect on local development. The local production culture and existing rules and practices govern the strategy of firms (Antonelli 1997). This does not imply past dependency or historical determinism. Through processes of restructuring, a path can be abandoned, even if in most cases the development of a new path depends upon earlier structures (Karlsen 2003).

We argue that it is important to stress that the interaction between FDI and local conditions, and thus the outcome of FDI, depends on the nature of the FDI. In some cases, FDI is limited to pure economic capital, but in many cases, FDI involves changes in social relations and the flow of skills and knowledge. The flow of goods and services from local firms is an example of potential local effects. Large firms funded by FDI may represent models of business efficiency, and other firms in the community may adopt their methods. Other local effects concern possibilities for transferring technologies and competence from externally owned firms to local ones, through various types of business relationship, or simply as a result of employees bringing with them new ideas when changing jobs or starting their own businesses. Hence, a broader understanding of the dynamics of FDI as development or dependency has to be rooted in studies that reveal how different forms of FDI interact with different national and local contexts.

Different characteristics of FDI and different local conditions will generate different FDI outcomes. Table 1 shows a simplified model in which we distinguish between two types of FDI investment (FDI as capital and FDI as a mix of capital, networks and knowledge) and two types of local conditions (local conditions characterised by hierarchical modes of organisation and limited entrepreneurial experience, and local conditions characterised by an entrepreneurial culture). In a situation in which FDI is dominated by economic capital and in which the investment takes place in a milieu characterised by limited entrepreneurial experience, the outcome will be 'FDI as strong dependency'. However, if this type of FDI takes place in a locality with an entrepreneurial culture, dependency will decrease, thus generating an outcome of 'FDI as modest dependency'. When FDI that is a balanced mixture of economic capital, social networks and knowledge occurs where there is an entrepreneurial culture, the outcome will be 'FDI as strong development'. Possibilities for local development will decrease if this type of investment takes place where there is limited entrepreneurial experience, exemplified by the outcome of 'FDI as modest development'.

In the next section, we examine the usefulness of our model by empirically analysing FDI in two industrial towns in Western Norway, Odda and Rubbestadneset (Figure 1). They are both located in the county of Hordaland. The number of inhabitants in the industrial town of Odda is about 4,500, while the whole municipality of Odda counts about 7,500 inhabitants. The number of inhabitants in Rubbestadneset is 2,400. This industrial town is part of the municipality of Bomlo, which in total has around 10,800 inhabitants. The first town is dominated by the smelting industry and the second by the electrotechnical industry. The histories of the two selected towns are quite different. Natural resources have attracted FDI in the first town, while access to intangible technology resources has been the main attraction for FDI in the second town. The data have been collected from several interviews with managers of foreign firms in each area, supplemented by information from local firms, the local government and other informed individuals in the area. We have also used existing literature.


Odda: The Smelting Industry Town


Foreign companies have had an important role in Norway's economic history. Foreign-owned export-oriented production on a large industrial scale began with the metallurgical and chemical industries based on hydroelectric power in nonmetropolitan areas in the early 1900s. Since the 1920s, other investments have been made in manufacturing and trading firms and services supplying the Norwegian market. Foreign ownership has also played an important role in the offshore-based petroleum industry since its inception in the late 1960s. The total volume of FDI in Norway (in companies in which foreign investment accounts for at least 10 percent of the share capital) has doubled from about 9 billion [euro] in 1990 to around 18 billion [euro] in 1997 (Rusten et al. 2000). An increasing share of these investments has been market-oriented investment concentrated in metropolitan areas. In Norwegian metropolitan areas (i.e., the city regions of Oslo, Bergen, Stavanger and Trondheim), 21 percent of employment is in companies in which foreign investors control more than 50 percent of the share capital. In non-metropolitan areas, the employment share of foreign firms is about 10 percent (Jakobsen and Rusten 2003). However, there is still a large amount of resource-motivated foreign investment in industrial towns in non-metropolitan areas that depends on certain industrial sectors. Our first case, the smelting industry town, illustrates this type of FDI.

Odda is located at the head of one of the fjords of Western Norway (The Sorfjorden). The area is sparsely populated and the distance to the nearest city region, Bergen--the second largest city in Norway--is approximately three hours by car. The industrialisation of Odda started with the utilisation of water-power resources in the early 1900s. Transmission technology did not enable the transport of electricity over long distances without considerable losses, and location near a waterfall was therefore the main criterion for locating an industry requiring low-cost electrical power. This initial advantage was lost with improvements in energy-transmission technology after 1930. However, the machinery was too costly to move and almost impossible to sell to other potential users without considerable losses. In addition, the large majority of the workforce had no other experience than working at the plant.

In the early 1900s, Norwegian engineers carried out promising technology experiments for new production methods and products, but in most cases, they lacked the necessary experience and capital to set up and run a smelting industry (Hodne and Grytten 2002). Hence, FDI played an important role in the establishment of Norway's many plants in the metallurgical and chemical sector during the period from the early 1900s to the 1930s. This was the case for the three plants in Odda.

The foreign source of the investments in Odda has changed over the years. The first plant, Odda Smelteverk, was built by British capital and started production in 1908. Then it was owned by Norwegians during the 1920s, before it was again purchased by a British company in 1937 (but not by the original owners). This ownership situation remained until 1998, when the American company, Phillip Brothers Chemicals, took over the plant as well as the control of much of the industry on a global basis.

French FDI established a second plant, today known as Tinfos Titan & Iron in 1916 (Haugaard 2001). After several years, investors from the UK and the US took control. In the 1970s, the difficult market situation forced these owners to sell. As no new private investors were interested in taking over the outdated plant, the Norwegian government bought the business. It decided to reorganise production, basing it on a mineral more suited to the size of the facility. Large investments in machinery were necessary to restart production. As part of this reorganisation strategy, the government invited a Norwegian company and an American company to become partners (Rosjo 1988). A couple of years later, the government sold its share. A Norwegian company, The Tinfos Group, took over as the majority shareholder, while the remaining shares were split between two foreign investors and one domestic investor. In addition to the plant in Odda, the Tinfos group includes a smelting plant in the southern part of Norway. The group is the largest producer of titanium dioxide slag and high-purity pig iron in Europe.

A third plant, Norzink, was established in the smelting town by Belgian capital and started the production of zinc in 1924. A Swedish company that was the plant's ore supplier joined the Belgians in 1965. In 1980, the Belgians sold their share to a British company. This was the situation until 2000 when the plant was bought by the Finnish company Outokumpu. This company has during its history developed from a small mining company into a worldwide producer of zinc, stainless steel, copper products and related technology. Outokumpu has some 19,000 employees in more than forty countries. Outokumpu is the fourth largest zinc producer in the world.

In the pioneering period, the FDI in the smelting industry town incorporated all the forms of economic capital, skills and knowledge that were needed to establish the industry. In fact, the original FDI created the town. The management of the plants played a paternal role in the town as providers of social services in the community. The firms constructed and provided subsidised housing, arranged leisure activities, operated shops, organised local transportation and ran various private services. They were involved in most of the town's infrastructure. In this period, the outcome was FDI as development characterised by extensive local effects. In many ways, this resembles the situation well known from many mining and factory towns in Europe.


In the last decade, Odda has gone through major changes. The firms' historically strong position as workplaces have weakened, and the number of employees at the three smelting plants has fallen from 1,010 to 786 between 1994 and 2001. Despite this reduction, the plants have increased production. An important explanation is that technological improvements have enhanced productivity and reduced the need for personnel. Reduced employment has also been due to activities being co-ordinated with other parts of the company and outsourcing.

Technological intensification and increased international competition altered the structure within the metallurgical sector in both Norway and abroad. Economies of scale caused capacity to be concentrated in large production units, and those unable to afford upgrading were forced out of business (Rusten and Sunnevag 2003). The Odda Smelteverk, in particular, ran into difficulty. High costs of labour in Norway made it difficult for it to compete with low-cost foreign producers within its sector. It tried to restructure by introducing new products, but huge losses forced the subsidiary to close down in 2003. its American owners did not want to go further with the development of new products and decided to sell the technology to a German company. The closure resulted in a loss of about 200 jobs. The number of employees in the smelting industry in Odda is now about 550.

The situation has been quite the opposite for the Finnish-owned subsidiary, Norzink. This subsidiary has been making a profit, and in order to further develop the plant, its Finnish owners plan to invest about 280 million [euro] between 2003 and 2007. This renewal plan seems still to be the strategy when the New Boliden, a Swedish company, took over the zinc division of Outokumpu in 2004, including Norzink. As part of the deal, Outokumpu got 49 percent of the shares in New Boliden. New Boliden is a mining and smelting company focusing on production of copper, zinc, lead, gold and silver. The total number of employees is approximately 4,900.

The first phase of the renewal plan at Norzink involves upgrading and modernising existing production equipment, while the second phase involves a comprehensive increase in production capacity. Employment at the subsidiary is not expected to increase, but construction will generate a large demand for goods and services, which could be met by local suppliers to a certain extent. This major technological upgrading is expected to be of great importance to secure future market position.

The third smelting company in Odda, Tinfos Titan & Iron, has been making a profit during the last couple of years. It has also carried out some modernising of existing production equipment. As in the case of Norzink, this company is a dominant actor within their business sector.

Partly as a consequence of this decline in employment in the core industries in the area, people--particularly younger ones--have out-migrated. The population in the municipality fell by nearly 10 percent between 1990 and 2003 (from 8,300 to 7,500). The isolated location of Odda makes it difficult for its inhabitants to commute to employment opportunities elsewhere. Only 13.2 percent of the employed workforce living in Odda commutes to work in another municipality (SSB 2001). This is, with the exception of the city-region of Bergen, the lowest rate of commuters of all the thirty-three municipalities in the county of Hordaland.

FDI has resulted in some outsourcing by the three dominant smelting companies, but the local spillover effects have been modest. The smelting industry in Odda obtains most goods and services from firms outside the industrial town. Local suppliers are either lacking or cannot compete. Local supply linkages mainly involve maintenance and standardised in-person services. There is a lack of innovative networks, joint projects or technology transfers between the smelting industry and other firms in the industrial town. The dominant smelting firms are involved in national and international R&D and networks through their headquarters abroad. The formation of networks is partly due to the internal organisation of these companies. The dominance of a few producers or consumers is a significant explanation of networks. Linkages locally and elsewhere in the country are necessarily weak because nearly all customer relations are abroad. No entities, including subsidiaries, undertake any local R&D activity.

One element that could have created a dynamic business climate is the presence of three large companies in related sectors, which therefore have similar levels of competence and skills. These should enable collaboration, but such collaborative projects hardly exist. Exceptions are in non-core activities, such as health services, recycling waste, accountancy and computer services and not least, providing electricity based on hydropower. There are no collective innovation projects related to core activities. These kinds of activities might have exposed vulnerability, and successes required trust, which is often difficult to develop. In addition, technological differences between parties reduce the motivation to collaborate further.

In summary, the content of the FDI in the last decade differs from that prevailing in the pioneer period. The FDI is dominated by economic capital, and the result seems to be stagnation and FDI as dependency.

Path-dependent dependency

The motives behind FDI can only partly explain the lack of network-related and knowledge-related spillover effects of FDI-related activities. To understand the situation, we must examine the place-specific conditions of the industry town that resulted from the original FDI. All economic activity is embedded within a socio-cultural system and is therefore socially situated. A local production culture, developed along pathways or trajectories, incorporates collective knowledge and informal rules, which are constantly produced and reproduced by the actions of economic actors and which, at the same time, establish the conditions in which those actions take place.

The industrial culture of the smelting industry town is based on a history of dominant foreign ownership. This business climate is characterised by large hierarchical and specialised organisations and by technology with strong external ties. This has resulted in little room for individual initiative, limited local entrepreneurial experience and limited focus on industrial creativity and innovation. The culture of this industrial town is, in other words, a reflection of yesterday's accumulation regimes, which obviously have difficulty in coping with rapidly changing environments. A representative of the local business community made the following statement: 'There is no culture for entrepreneurship in this area. We have always expected the large foreign firms to provide the necessary number of jobs. This has been our attitude, and it is very hard to change it' (Jakobsen et al. 2000). Another key source put it this way: 'Large firms have been running this society, and people have not taken the initiative to be creative. We almost have to force people to change their way of thinking in order to create new job opportunities in the area' (ibid.).

Factory workers have had lifetime employment which has tended not to produce ideas about independent business initiatives. The small number of new firms starting up in the community illustrates the lack of an entrepreneurial culture. In the period 1996-1998, the number of new firms formed per 1,000 inhabitants was 3.8 in Odda. The median for the county of Hordaland was 4.7, while the highest value among municipalities within the county was 9.0 (Jakobsen et al. 2000).

This kind of path dependency can strengthen the situation of FDI as dependency. Existing collective knowledge systems and informal rules of conduct become obstacles for future development and make it hard to establish new paths of development and to increase the level of innovation and the formation of new firms. It is difficult for the foreign firms to find potential local partners for networking and for exchanging knowledge. In addition, there is no tradition or culture of workers at these large firms starting their own businesses. The result is that the town has been caught in an entrenched situation characterised by both a functional lock-in, which is related to comprehensive material investment in a dominant sector, and a cognitive lock-in (Grabher 1993). The latter is a consequence of the development of deep and specialised industrial competence and the creation of specific rules of conduct, which restrict the ability of the local production system to reorganise when markets and technology are changing (Floysand and Jakobsen 2002). At the same time, various social and political ties even including politicians in the Central government are involved in taking care of the interests of this community.

To compensate for the employment losses in the smelting industry, which has characterised the 1990s, a local restructuring program, supported by the national government, was set up in 1998. The aim of this program was to develop new firms, mainly SMB (small- and medium-sized businesses), and to develop new areas of activity. Different projects have been undertaken to support the setting up of new firms, the development of existing firms and the upgrading of local competence. The program ran from 1998 to 2003 at a total cost of about 6 million [euro], which was equally shared between the national government and local authorities.

The restructuring program has, in co-operation with the public institutions targeting SMBs and regional investment, Innovation Norway and SIVA run several projects to diminish the damage of rationalisation and closures and to develop a new production culture that emphasises local entrepreneurship and innovation. The aim has been to enable these communities to obtain a broader economic platform than is offered by relying on only the dominant manufacturing plants. One project has been the development of training programs for entrepreneurs, both integrated in the elementary school (age 14-17) and as courses for adults. In the latter case, these have been combined with financial support to enable business start-ups. Another category of projects initiated by the central government has been to move public institutions to the community to help broaden the type of jobs that can be offered locally. Finally, some projects have focused on skills such as ICT, culture and tourism to prepare the workforce for other jobs. It should be noted that these efforts have taken place in collaboration with the branch plants. Their long tradition within these communities, combined with the fact that the management systems here as elsewhere in the Norwegian economic communities are closely interwoven with each other and with political and bureaucratic power, clearly illustrates that the social cohesiveness even in the global economy is fairly intact (Gronmo and Loyning 2003; G. Rusten, J.R. Bryson and H. Gammelsaeter, 2005).

In sum, the restructuring program has initiated 251 projects of different sizes and duration. The progress has been fairly good in most of these projects (Jakobsen 2003). The program has also been involved in various courses to strengthen the competence of the local inhabitants. The program has in total contributed to 265 new jobs and has been an important instrument in the restructuring of Odda. It has strengthened the competence among the inhabitants and lowered the threshold for new firm formation. But even if the ongoing restructuring program has delivered some promising results, it is a slow process to unlearn traditional routines and to establish a new entrepreneurial culture. To be successful, the development of new paths should combine strengths from existing paths, such as the town's strong local culture for collective action, with new ideas and competence.

Rubbestadneset: The Electrotechnical Industrial Town


Our second industrial town, Rubbestadneset, is part of the municipality of Bomlo, an island off the western coast of Norway. The island, which has bridge connection to the mainland, is located mid-way between the two largest city-regions of western Norway, Bergen and Stavanger. Travel time by car is about three hours from Bomlo to both of these cities. There is also connection by express boat, which arrives at Rubbestadneset several times a day. In addition, the smaller towns of Leirvik and Haugesund are within a short distance of the island.

Rubbestadneset has a long industrial tradition. Many of the firms in Rubbestadneset and on the rest of the island were established by local entrepreneurs and based on family ownership. A few have changed ownership through mergers or acquisition by other Norwegian owners. FDI is represented by a large electromechanical factory producing propellers and gearboxes for vessels. The firm was rescued by foreign capital when it went bankrupt in the 1980s.

The electromechanical factory, with 470 employees, started as a family business in 1903. Known as the Wichmann Engine Factory, from the 1930s, it produced ships propellers and diesel engines. During the 1970s, the original owners changed the organisational structure of the firm to a managerial form. They introduced new technology and expanded internationally. While, because of the economic instability of the time, the strategy was too ambitious, it was financially supported by the central government, which from the Second World War to the 1990s was engaged in several industrial rescue development plans in rural areas.

FDI and foreign ownership were the last resort to solve this particular firm's economic crisis. The government developed a rescue plan and an extensive search for owners to keep the business running. Owing to conflicts between various business and regional interests, this turned out to be a very difficult task. From the point of view of several of the involved parties, a foreign take-over was considered to be the second-best solution, but the search for a Norwegian owner to manage the business failed.

In 1986, the Finnish company Wartsila purchased the firm. The new foreign owners used the acquisition to gain access to technology and products that enabled them to deliver a complete technology system to customers. The subsidiary has now become a centre of excellence within the corporation and has provided a step towards increased control over the Norwegian market. Major customers come from Norway and many other countries, and it now trades in global markets.

The FDI incorporated extensive technology rearrangements and product adjustments at the subsidiary to enable the subsidiary's output to be consistent with the package of products produced by other parts of the company. According to the management, this was a tough process for the subsidiary, as the Norwegian firm had been known in the market for its original product. In addition, it required a great deal of effort to change production techniques from ones that the workforce knew very well.

The new strategy did, however, turn out to be successful and provided a basis for competitive strength and growth. Moreover, external ownership did not make the subsidiary 'a puppet on a string' as many had feared. Rather, the subsidiary has been relatively independent of the parent company in terms of both day-to-day operations and long-term decision making. For example, the local firm undertakes a relatively large amount of R&D, with several projects engaging major research institutions in Norway. This Bomlo firm is one of several local companies within the Wartsila Corporation that supports the operations within the respective home country in addition to be a central of excellence for the corporation as a whole. This matrix organisation ensures that different business areas carry prime responsibility and direct interface with customers.

From its head office in Finland, the mother company Wartsila Corporation co-ordinates plants and offices in a number of countries. In total, the group employs about 12,000 persons. Its main strategy is to provide complete solutions for power generation and marine propulsion. The role of Wartsila Norway at Rubbestadneset within this TNC is to design, manufacture and sell propellers, gearboxes and control systems for all types of vessels. In 2000, the production of propellers was taken over by a British company, John Crane-Lips, but the production was maintained at the production site at Rubbestadneset. However, when Wartsila Corporation acquired John Crane-Lips in 2002, its production unit at Rubbestadneset was renamed Wartsila Propulsion and is now operating in close co-operation with Wartsila Norway. Wartsila Propulsion employs about 120 persons, while there are 350 employees at Wartsila Norway. The total numbers of jobs in these FDI has been stable during the last decade.


The FDI at Rubbestadneset has resulted in several spin-offs, both in this industrial town and in the municipality as a whole. The foreign-owned firm has become an important learning arena for local entrepreneurs and has been responsible for several related business activities within the maritime sector of the community and region as a whole. These local firms sometimes compete, but at other times supply different markets. Collaborative projects include agreements about production-capacity exchange during busy periods. Occasionally, neighbouring firms borrow machinery from each other, which enables firms to avoid costly investments in rarely used machines. An important basis for these deals is that the parties know each other and the technology. Local customer links are sometimes based on long-term relationships. Customers' opinions about products are of great value to the producers and may stimulate product improvements or the development of new products. The foreign-owned firm is part of a community in which business seems relatively competitive domestically and internationally. The firms share the same values, background and understanding of technical problems. Further, it seems that foreign ownership has had no negative effects on the business community. On the contrary, the foreign-owned company's success has inspired others to start their own businesses.

The municipality has an entrepreneurial culture. In the period 1996-1998, the number of new firm formation per 1,000 inhabitants was 5.7 in the municipality of Bomlo. This is 50 percent higher than in the municipality of Odda, and 21 percent higher than the median for the county of Hordaland (Jakobsen et al. 2000).

There is also a tight labour market in this municipality. According to one manager, one of its effects is a shortage of engineers. On the other hand, the fact that wages are competitive with workplaces in other nearby communities is a positive factor. In addition, there seems to be a mutual agreement not to poach each other's employees.

Recruitment strategies are one reason why the foreign-owned firm has regular contact with local schools. Teachers and students are invited to guided tours of the factory, and apprenticeship contracts are sometimes offered. Being foreign owned and relatively large has been used as an indicator of competitiveness when the firm promotes itself as an attractive workplace, illustrated by the following statement from the management: 'One of the inducements for younger people to choose this type of career is that we are an international company. We have, in fact, about 26 of our people travelling to different places around the world every day' (Jakobsen et al. 2000).

Human-capital inertia links the firm to the community. Another important aspect is related to image. The coast, sea and scenery are important parts of the foreign-owned firm's image: 'We have not always been particularly aware of these values, as they seem so ordinary and not very exotic. We now believe that these elements represent qualities that others may find attractive. This is, at least, what we experience when we take foreign visitors on fishing trips' (Jakobsen et al. 2000).

For many years, there has been significant population growth in the area. The number of inhabitants in the municipality as a whole has increased from 9,700 in 1990 to 10,650 in 2003, a 10 percent growth. The growth has been especially strong in the industrial town of Rubbestadneset, which has increased its number of inhabitants by almost 25 percent during this period. A short distance to other towns in the region makes commuting an alternative for people living in the area, and 21 percent of the employed workforce in this municipality commutes to other municipalities (SSB 2001). However, this is relatively low compared with the other municipalities in the region of Hordaland, about two-thirds of which have a higher commuting rate.

The community wants to build a reputation for being 'high-tech' and offers its inhabitants jobs and a high quality of life. The local authorities welcome steady population growth and are also in the forefront of ICT and broadband development in Hordaland county (Rusten and Ellingsen 2004). In this context, making building sites available for new business activities is an important development strategy. Communication improvements during the last decade have been helping dual-career families that need a more varied labour market in the region if both partners are to obtain jobs in accordance with their formal qualifications. Better access to the outside world is valued by those wanting a more urban lifestyle. Improved communications to the community also simplifies the logistics of producing goods and delivering services, which is important in the context of global markets, where 'just-in-time' delivery matters.

Path-dependent development

There is, similar to the Odda case, path dependency in the electrotechnical industry town, but it has taken a different form. During its history, the area has developed an innovative industrial culture. The dominance of locally owned small-scale activities based on informal competence and a differentiated technology has historically dominated this locality, and attitudes towards creativity have become institutionalised. There has also been a strong rivalry between co-located firms that can effectively compare their performance with that of their competitors, stimulating processes of innovation (Floysand and Jakobsen 2002). These communities representa type of culture that promotes innovative activities and entrepreneurship (Wicken 1997). The introduction of a large foreign-owned firm into this entrepreneurial area seems to have had a positive effect on local innovation. FDI has also provided the local economy with formalised and research-informed knowledge and has introduced professionalism and modern managerial methods. This supplements local practical competence and the informal modes of organisation that, until recently, have dominated business life in the area.


Two distinct outcomes of FDI in industrial towns have been demonstrated by our empirical evidence. To a certain degree, they seem to illustrate two of the outcomes introduced in our theoretical discussion in Section 2: i.e., 'FDI as strong dependency' in the Odda case, and 'FDI as strong development' in the Rubbestadneset case.

However, it is important to state that the outcome of the interaction between FDI and the local economy is by no means static because of changes of strategies and practice within the TNC or within the local communities. The recent restructuring program for Odda has strengthened the collaboration between the local authorities and the subsidiaries of TNC. Several projects have been run to develop a new attitude among the inhabitants towards entrepreneurship and innovation. The restructuring program also aims to strengthen firms and sectors that are less dependent on the smelting industry, for instance tourism. After a slow start, the know-how and networking of the subsidiaries have also been activated in this restructuring of the local economy. This new role for the subsidiaries in Odda and new local coping strategies indicate a more modest form of FDI dependency in the area.

Our model argues that the local outcome of FDI is a consequence of the interplay between characteristics of FDI and various local conditions. Still, other explanatory factors need to be discussed to nuance this simplified model. Two supplementary factors are especially important for the understanding of FDI's local outcomes. The first is the characteristics of the nation state of which the local production system forms a part. The second is the nature of international markets in which the subsidiary and the TNC are operating.

Despite the fact that the nation state has been redefined in a more global and internationalised economy, it continues to contribute significantly towards the shaping and reshaping of the economic map (Dicken 2003). States are containers of distinctive practices, cultures, institutions and regulatory systems. Norway is relatively non-hierarchical and egalitarian, and in this sense is an open society. Norwegians have relatively open access to other Norwegians irrespective of position, making it much easier to obtain information informally as well as formally. This openness is founded in the country's history, which includes several generations under the Danish and Swedish crowns, a social-democratic welfare state with no aristocracy apart from the Royal family and a culture dominated by ethnic Norwegians (G. Rusten, J.R. Bryson and H. Gammelsaeter, unpublished manuscript). As a consequence of this openness, the Norwegian economy is characterised by strong business and social links between the firm and the community, complex co-operation arrangements between the state, organisations and the economic sector and a proactive state in periods of economic recession. The specific 'ways of doing things' such in this case Norway makes it less suitable to use the classical branch plant definition and also problematic to find the stereotype branch plant in the Norwegian economy, i.e., a branch plant dominated by low-skilled and low-paid jobs, distant corporate decisionmaking and weak linkages to the local economy. Even if we have registered elements of 'FDI as strong dependency' in the Odda case, a proactive Norwegian state and the openness of the Norwegian economy shade the picture. The state played a pivotal role both in restructuring of Tinfos Titan & Iron during the 1970s and more recently by financially supporting the local restructuring programs that have promoted closer collaboration between the subsidiaries and the local community. National politicians and the Ministry of Industry were also actively engaged in finding new investors to take over the electrotechnical factory at Rubbestadneset. However, in this case, the strategy has been to keep the major business running rather than developing new firms.

The second supplementary factor that is important for understanding the local outcome of FDI is the nature of international markets. The TNC and its subsidiaries are operating internationally, and their strategies and dispositions are affected by the development in these markets. During recent decades, there has been a comprehensive reduction of jobs within the manufacturing industry in the western economy. Different factors explain this development. One is the cost of labour: industries in high-wage economies such as Norway are losing out on the international market to competition from producers in low-wage economies. Another factor is technology intensification: to maintain international competitiveness, the industry has to modernise and replace labour with new technology. A third, and related factor, is a more dominant position for TNCs. These corporations are in many cases global actors that can 'screen' the global landscapes for the best possible production sites. This makes jobs and capital more mobile, compared with an economy dominated by domestic firms. In several cases, TNCs have chosen to relocate their production sites to low-cost nations (Massey 1992; Daniels et al. 2001; Dicken 2003).

Related to our empirical discussion, it may be argued that the developments on the international markets for the smelting industry are a vital explanation for job losses and lack of local development in the Odda case. When Odda Smelteverk was closed in 2003, its owners said it was a consequence of fierce international competition from low-cost countries. However, both Norzink and Tinfos Titan & Iron have maintained their international competitiveness despite being exposed to the same competition from low-cost producers. Also Wartsila at Rubbestadneset is operating in a market with fierce competition from low-cost countries but is somewhat more protected by a more complex technology content. Thus, the various developments of these FDI can be related to attributes of the TNC. While, for instance, the previous and present owner of Norzink invested heavily in its plant in Odda to secure future market positions, the American owner of Odda Smelteverk decided against further investment in the plant. It tried to restructure the production, but decided that it was too risky to carry on with the investment plan. Even if the market situation is vital for understanding the development of subsidiaries, the responsiveness and strategies of the TNC combined with its capability and willingness to utilise local resources are more important factors.

Finally, it is also vital to understand the interplay between the FDI and the local economy in the light of the recent development within TNC organisation. There has been a general tendency during recent decades for subsidiaries to develop greater links to international networks within the TNC. Some have gained a more creative role, generating new technology by utilising local resources. To a greater extent, they contribute to the overall firm, beyond the concern for their own most immediate market and take on a more technologically creative function (Mudambi 2002). The traditional notion of a strong centralised command and control function of TNC is also a crude generalisation that is in fact misplaced. In a knowledge-intensive economy characterised by a more prominent role for knowledge and collective learning, large firms delegate a greater variety of functions and more responsibilities to the subsidiary level, which enables subsidiaries to operate efficiently and respond rapidly to changes (Ghoshal and Bartlett 1990; Jones 2002; Jakobsen and Aslesen 2003). In general, this will increase the possibilities of developing more complex linkages between the subsidiary and the local economy. In the case of Rubbestadneset, there is a long tradition of innovative networking and knowledge transferral between the subsidiary and local firms, while the case of Odda has recently shown some promising tendency towards greater responsiveness and transfer of expertise from the subsidiaries to the local community.

Concluding Remarks

The outcomes of FDI are linked to the interaction between local history and community qualities and the characteristics of the industries in which the investment takes place. Our case studies have illustrated two different outcomes. The smelting industry town represents FDI as dependency. Historically, the foreign firms behind the FDI have been entrepreneurs, but in recent decades the content of the FDI has been dominated by economic capital. Local purchases of goods and services have been restricted to maintenance and standardised services. Thus, characteristics of FDI and local conditions restrict the interchange of technology, competence and business practice. Compared with the other company town case, the production process is more standardised. However, the recent restructuring program for Odda strengthened the collaboration between local authorities and the subsidiaries. Several projects have been run to develop a new attitude among inhabitants towards entrepreneurship and innovation. A new role for the subsidiaries in Odda and the development of new local coping strategies indicate a development towards a modest form of dependency. This illustrates that the outcome of FDI is by no means static.

Foreign ownership in the entrepreneurial industrial town represents a different situation and illustrates FDI as development. The FDI is characterised by a balanced mix of economic capital, networks and knowledge. Local effects of FDI have developed in the form of innovation networks and new firm formation. The foreign-owned plant undertakes a relatively large amount of R&D, and local firms have co-operated in R&D projects. To some extent, the foreign firm has provided employees with possibilities and opportunities for learning as well as knowledge spillovers. Several entrepreneurs who used to be employed by the foreign-owned subsidiary have started their own businesses. By interacting with a culture that promotes innovative activities and entrepreneurship, the foreign owner and local companies have used FDI as a tool for improving their technology and competence by developing local and regional network systems.

Besides this, other explanatory factors need to be discussed to nuance our relatively simplified model where local outcome of FDI is a consequence of the various characteristics of FDI and diverse local conditions. The nature of the nation state which the local production system forms a part must be integrated into this discussion. A proactive Norwegian state and the openness of the Norwegian economy make this economy less suitable for a classical branch plant definition. Also characteristics of the international market where the TNC and its subsidiaries are operating are important for understanding local outcomes of FDI. There is an important difference between subsidiaries producing standardised products in market with fierce competition from low-cost countries and producers that are operating in a market where the products are protected by a more complex technology contents. In addition, the recent developments within TNC organisation are important. In general, large firms have delegated more responsibility to the subsidiary level, increasing the possibilities of more complex linkages between the subsidiary and the local economy.

However, it is not possible to develop an all-embracing model of TNC impact on the local economy. Whether a foreign plant involves inconveniences or benefits will depend on the specific context of the investments. Our discussion has illustrated this variation in outcome and outlined some of the important factors that can help in explaining it, emphasising attributes and functions of the TNC and the nature and characteristics of the local economy.


The Research Council of Norway provided financial support for this study. Thanks to Professor Jens Christian Hansen for constructive comments on ah earlier version of this paper and Senior Research Engineer Kjell Helge Sjostrom for drawing the map.


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STIG-ERIK JAKOBSEN Institute for Research in Economics and Business Administration, Norwegian School of Economics and Business Administration, Bergen, Norway (e-mail:

GRETE RUSTEN Institute for Research in Economics and Business Administration, Norwegian School of Economics and Business Administration, Bergen, Norway (e-mail:

ARNT FLOYSAND Department of Geography, University of Bergen, Bergen, Norway (e-mail:
Table 1
Local outcomes of foreign direct investment (FDI) as a
consequence of different characteristics of FDI and
different local conditions

                                      Type of FDI

Local conditions              FDI as capital   FDI as a mix
                                                of capital,
                                               networks and

Lack of entrepreneurial       FDI as strong    FDI as modest
  experience                    dependency       dependency
An entrepreneurial culture    FDI as modest    FDI as strong
                                development      development
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Author:Jakobsen, Stig-Erik; Rusten, Grete; Floysand, Arnt
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Date:Sep 22, 2005
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