Foreign investment

In recent years, foreign expansion of Icelandic companies has gained pace rapidly, due in large part to acquisition of companies abroad. The total stock of foreign direct investment (FDI) by Icelandic residents grew by 76% year-on-year to EUR 19 billion (1,732 b.kr.) in 2007, and has grown by over 61% per year on average over the past ten years.

The most common means of expanding abroad has been through FDI. The Icelandic market is small, and companies in markets such as pharmaceuticals, financial services, food production, retail commerce, property development, aviation and shipping have acquired foreign subsidiaries in similar sectors so as to broaden their base and increase their revenues and profit. Foreign investments have centred on the UK and Scandinavia but have focused to a lesser extent on continental Europe and other areas.

Investment in foreign equities has also grown substantially over the past decade. Before full liberalisation of cross-border capital movements in 1995, residents owned only approximately EUR 77.9 million (6.6 b.kr.) in foreign capital equities. Over the thirteen years to 2007, the stock had increased to EUR 11.8 billion (1,075.4 b.kr.).

Foreign direct investment in Iceland has also been growing over the past few years. In 2007, FDI in Iceland amounted to around EUR 2.7 billion (233 b.kr.), and the stock of FDI investment in Iceland increased by EUR 2.2 billion (202.4 b.kr.). This increase must be interpreted with caution, however, as it is to a large extent a pass-through investment of Icelandic residents via foreign holding companies. Over the past few years, non-resident funds have been investing in companies that are listed on OMX Nordic Exchange Iceland. Furthermore, franchising has been increasing in Iceland, especially in retail, consulting, auditing and accounting.

Liberalisation of cross-border capital movements has led to a profound change in the composition of residents’ financial asset portfolios. Before full liberalisation in 1995, residents owned only approximately EUR 156 million (13 b.kr) in foreign securities, but this figure had increased to EUR 18.3 billion (1,672 b.kr), or 130% of GDP, by the end of 2007. In 1995, Iceland’s outward investment stock was equivalent to approximately 14.5% of GDP. Twelve years later, in 2007, it had risen almost thirty-five-fold to 506%.

The composition of foreign assets has also changed substantially over this period. Reserve assets and trade credit once accounted for a significant portion of foreign assets but are now relatively unimportant. Instead, foreign lending has surged to 32% of foreign assets. The share of foreign equity has also increased to roughly one-sixth of the total foreign investment stock. On the other hand, inward equity investment accounts for only about 4½% of total foreign liabilities. Iceland’s outward FDI accounted for about 24% of the total foreign assets at the end of 2007. Lending by domestic credit institutions to foreign borrowers is one of the largest single contributors to the increase in foreign assets. Foreign lending amounted to EUR 0.48 billion (44 b.kr.) in 2001 but had skyrocketed to EUR 23.1 billion (2,104 b.kr.) in 2007. Pension funds’ foreign portfolios also soared to EUR 5 billion (458 b.kr.) by the end of 2007, accounting for 7% of Icelandic residents’ total foreign assets and just over 27% of foreign portfolio holdings. Extensive direct, portfolio and real estate investment by other Icelandic residents explains the rest of the growth in assets. Outward FDI and equity portfolio investment exceeded inward investment by EUR 16.8 billion (1,528 b.kr.) at the end of 2007.

Sectoral limitations on foreign direct investment

The only restrictions on investment by non-residents in Iceland apply to foreign direct investments in fisheries and fish processing, energy production and distribution, and aviation companies. Restrictions on investment in the fisheries sector are the only ones that apply to EEA residents and have the purpose of protecting the nation’s exclusive rights to the fishing grounds around Iceland. Direct foreign ownership in fisheries companies is prohibited, but companies that are up to 25% foreign-owned (33% in certain circumstances) may own fisheries companies. Combined direct and indirect ownership up to 49% is possible, however. Energy harnessing rights and production and distribution of energy are restricted to EEA entities. Entities domiciled outside the EEA may not own more than 49% of the shares in Icelandic aviation companies.

Economy of Iceland,Central Bank of Iceland