Examining timberland ownership and control ...

Forest Policy and Economics 70 (2016) 39–46

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Examining timberland ownership and control strategies in the global forest sector J. Korhonen a,⁎, Y. Zhang b, A. Toppinen a a b

University of Helsinki, Pl 27, 00014 Helsinki, Finland South China Agricultural University, College of Economics and Management, Guangzhou 510642, China

a r t i c l e

i n f o

Article history: Received 26 August 2015 Received in revised form 18 February 2016 Accepted 18 May 2016 Available online xxxx Keywords: Timberland Forest industry firms Vertical integration Forest ownership Strategy Resource scarcity

a b s t r a c t This is the first study in a global context exploring the state of industrial timberland ownership and control and modelling of the binary choice of ownership strategy. In our sample of the 100 largest forest product companies in 2012, 40 have timberland ownership and 51 are integrated into timberland by ownership or leasing arrangements. The descriptive analysis indicates that the vertical integration strategies vary between companies from different regions. Despite recent timberland divestments in North America and the Nordic countries, the area reported for timberland in ownership and control among the top 100 companies has increased between 2007 and 2012 due to growth in emerging countries. The results of logistic regression analysis indicate that larger, more profitable and pulp-production oriented companies are more likely to be vertically integrated into timberland. The underlying reason can be that the pulp producers are financially more vulnerable to the risks associated with a reliable flow of raw material to their mills. In a dynamic market situation with increasing competition over arable land, more research is required to understand the interplay between global strategies across different forest industry companies, and between forestry and other forms of land use. © 2016 Elsevier B.V. All rights reserved.

1. Introduction Natural resources play an increasingly important role in global trade, and are identified as a crucial determinant of success for many economies in the future. However, the demand-supply gap of raw material in the industries relying on wood is widening due to a host of intertwined “megatrends”, such as growth in global population and consumption, and resource scarcity (KPMG, 2012). Furthermore, large-scale shifts in industrial forest ownership have been taking place around the world since the 1980s, when the forest industry started to divest their timberland for institutional forest owners in the United States. In those areas where institutional ownership is predominant, there are implications on the market supply and price of different forest products used as industrial inputs (Flynn and Pahkasalo, 2015). As timberland ownership of forest industry is expected to increase the price negotiation power in wood markets and to reduce the risk of raw material price increases (Lönnstedt, 2007; Lönnsted and Sedjo, 2012). If predicted resource scarcity is realized in increasing prices for wood and other raw materials, then it might be reflecting on the future industry competitiveness. Access to — and control over — the resource base would therefore become an even more important source of competitive advantage for firms in the natural resource sector. ⁎ Corresponding author. E-mail address: jaana.e.korhonen@helsinki.fi (J. Korhonen).

http://dx.doi.org/10.1016/j.forpol.2016.05.015 1389-9341/© 2016 Elsevier B.V. All rights reserved.

This phenomenon is becoming evident in the global forest products sector where firms are expanding their supply sources to industrial semi-natural forests and fast-growing plantations (Barua et al., 2014). In recent years, more and more firms have been acquiring large-scale lands for securing access to resources (see, e.g., Deininger et al., 2011). Industrial ownership and control of timberland — a form of backward vertical integration — is becoming an increasingly interesting study area in the global forest sector as the competition for arable land to meet demands for food, fiber, energy and ecosystem services further intensifies (Evans et al., 2012; Barua et al., 2014). Previous literature has tended to this development and considered its strategic implications. Toppinen et al. (2010), for example, explained how the increase in market demand and the availability of fast-growing forest plantations had especially driven pulp and paper sector firms to relocate their production from a developed country base to Asian and Latin American countries where crop rotation periods are typically much shorter. Simultaneously, the effects of establishment of fast-growing plantations on natural forests has been in particular dividing the opinions of the forest industry, local communities and Non-Governmental Organizations (see Vihervaara and Kamppinen, 2009; Gerber, 2010; or Kröger, 2012). Fernholz et al. (2007) concluded that forest product companies have been forced to reevaluate the role of their forests as a strategic asset. Until now, the literature on timberland ownership focused only on North America and the Nordic countries, where the companies have

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J. Korhonen et al. / Forest Policy and Economics 70 (2016) 39–46

been divesting forest land during the past two decades (Yin et al., 2000; Clutter et al., 2005; Bull et al., 2006; Lönnstedt, 2007; Bliss et al., 2010; Viitala, 2010; Lönnsted and Sedjo, 2012; Li and Zhang, 2014). Amidst this expanding literature, there is a gap in the strategic research from a global perspective on the analysis of how forest companies organize their access to and control over timberland, and if organizational factors affect the choice of timberland integration. The fundamental objective of this paper is to fill this gap by presenting a characterization of vertical integration among largest forest, pulp and paper firms globally. To do so, we analyze industrial timberland ownership and control among top 100 companies globally in 2012 based on the list by PricewaterhouseCoopers (2013). Specifically, we examine whether timberland ownership and control is a function of firms' (i) size and financial performance, (ii) business stream (such as energy, pulp and paper) and whether the decision to integrate into timberland differs across the geographical locations. Below, we first review the state of the art of vertical integration in the forest sector and present the theoretical principles of vertical integration, positing our research questions. Then we present our data, methods of analysis and results. The paper concludes with discussion of our results, future research and study limitations.

2. Vertical integration in global forest sector The global industrial timberland ownership is in flux. The most prevalent trend during the past few decades in the industrial timberland ownership is the rise of private and institutional ownership. A large share of industrial timberland controlled by forest product companies has been taken over by institutional investors such as timberland investment management organizations (TIMO) and real estate investment trusts (REIT), or previously active industrial companies have converted themselves into REITs (Yin et al., 2000; Clutter et al., 2005; Li and Zhang, 2014). For example, in the U.S., in 1994, all of the 10 largest private US timberland owners were industrial companies, but by 2006 eight out of 10 were already TIMOs or REITs (Bliss et al., 2010). While Lönnsted and Sedjo (2012) argued that the parallel changes in the Nordic countries have been smaller, industrial timberland ownership has been changing in the Nordic countries and Europe as well, and it is likely that the institutional investors will increase their timberland there in the future (Flynn and Pahkasalo, 2015). In New Zealand, the majority of industrial forest are nowadays owned by TIMOs and property management companies, and in Australia N50% of the planted forest has shifted from public ownership into private companies, mainly for TIMOs (Rhodes and Stephens, 2014; Flynn and Pahkasalo, 2015).

Table 1 Description of specific indicators in the analysis. Corporate demography

Economic background

Timberland status

Indicators Geographical location

Description Corporate headquarters location.

Product segmentation

Corporate business segments, including pulp, paper, and energy.

Size

Corporate total sales revenue in 2012.

Financial performance

Firm’s earnings before interest, taxes, depreciation and amortization (EBITDA); margins reported by PwC as financial performance indicator of a firm.

Industrial timberland

The forests the company reports as its asset.

Controlled forests

The forests company reports control, e.g., by leasing contract.

Other forests

The forests that are reported as outside production, e.g., natural reserves and protected areas.

Vertical integration in this study

Private companies have also increasingly invested in planted forests of emerging and developing countries (Toppinen et al., 2010; Mendell et al., 2011). Especially, Brazil and Uruguay have been attracting foreign investment during the past ten years, but during more recent years, there has been an increasing interest especially toward other Latin American countries such Colombia, Panama, Ecuador and Paraguay (Cubbage et al., 2010; Flynn and Pahkasalo, 2015). For private forest product companies, the timberland ownership remains the most preferred option in many areas with high land returns such as Brazil (Kröger, 2012), even though the competition for arable land and increased land prices have led to a search for alternative strategies for organizing forest ownership in emerging areas. As an example, outgrowers schemes in which industrial buyers make contracts with local farmers have become increasingly popular in many developing regions (see Desmond and Race, 2000; Cossalter and Pye-Smith, 2003). Additionally, while large plantation areas also exist in Asian countries, such as China and Indonesia, the large-scale public ownership and large social and environmental risks associated with private ownership are slowing down the private investment activity in the region (see Barua et al., 2014; Flynn and Pahkasalo, 2015 for more detail). However, the structure of ownership remains unstudied, and the existing data bases are not considered very accurate (Siry et al., 2010). This leads to the first research question: What is the global state of industrial timberland ownership and control among the top 100 pulp and paper companies? The backward vertical integration means that the manufacturer has decided to integrate with its upstream suppliers. Traditionally, rationale for vertical integration is based on transaction cost economies (TCE). The TCE theories originate from work by Coase (1937), who focused on writing and enforcing contracts, and these theories have been further developed by Williamson (1971). Vertically integrated companies share the belief that they can respond to market fluctuations more effectively than their competitors relying on sourcing from open markets (Williamson, 1971; Kaufmann and Carter, 2006). According to Sun et al. (2013), the motivation for vertical integration into timberland ownership at the firm level is the same as at the macro level: to reduce market risk and improve the financial performance of a company (Yin et al., 2000; Rogers and Munn, 2003). Vertical integration into the timberland helps to buffer against financial losses caused by high cyclicality of prices and forest product demand by giving the opportunity to choose between harvesting from their own forests or buying from roundwood markets (Yin et al., 2000). In principle, holding industrial timberland can improve the managerial ability to make decisions that enhance long-term financial success by reducing dependency on raw material sourcing from open markets (Yin et al., 2000; Lönnsted and Sedjo, 2012; Li and Zhang, 2014). The solid financial performance of a company may affect timberland ownership and control strategies, so that more financially stable firms can more freely decide if ownership of timberland assets fits in the company strategy. For example, according to Flynn and Pahkasalo (2015), a recent and significant shift in timberland ownership from forest industry to institutional investors in Chile might indicate the need for locally operating forest companies to release their less-productive assets to enhance their financial performance. Findings by Li and Zhang (2014) showed in a sample of publicly traded primary forest product firms in the United States between 1988 and 2003 that timberland ownership enhances the financial performance of companies and lowers systematic financial risk, which would appear to challenge the decisions to divest timberland assets. However, timberland prices were on rise during the period of study, which may overemphasize the established positive linkage between financial performance and timberland ownership in the United States. The rationale for vertical integration beyond the neoclassical economic short-term cost minimization strategy perspective can be also drawn from the resource-based view of the firm (RBV) (Penrose, 1959): Firms acquire resources which are valuable and rare, and


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Fig. 1. Geographical Distribution and Quantity of Forest Holdings among Vertically Integrated Forest Companies in 2007 and 2012. The figure contains only the industrial owned forest holdings; reported leasing, concessions and natural areas are not taken into account. The number of companies reporting forest ownership is different and thus the numbers are inflated because of missing data. The graph is suitable for understanding the differences in areas in the larger picture. (Number of companies 37 in 2007 and 40 in 2012).

difficult to replicate or replace to gain a competitive advantage in a product market (i.e., so called VRIN resources, see Barney, 1991). The RBV suggests that the acquisition, integration and deployment of resources explains the variance between company performance (Wernerfelt, 1984; Barney, 1991; Sirmon et al., 2011). Especially pulp and paper industry is characterized with high asset specificity and lack of flexibility, meaning that assets such as production facilities would lose their value if excluded from their original use e.g. due to the lack of availability of pulpwood (Yin et al., 2000). In terms of international expansion, Zhang et al. (2014) identified the resource-seeking motivation as a central component of strategic decisions on firm boundaries among forest industry companies. Similarly, Zhang (1997) argued that lack of domestic timberland encouraged U.S. companies to invest abroad, especially in Southern hemisphere countries with high timberland productivity (Cubbage et al., 2010). Building upon this rationale, our second research question is: Do firm background characteristics such as headquarter origin, firm size, and financial performance effect on the choice of timberland ownership and control? In the long term, the shift toward a bio-based economy might also interact with the strategic decisions by large multinational companies on their raw material sourcing, especially if their degree of product diversification increases (Ollikainen, 2014). Many export-oriented producers in the forest sector are currently moving toward higher valueadded strategies, seeking to support the decline in the competitiveness of commodity products (see Staffas et al., 2013; Pätäri et al., 2015). On the other hand, as to product diversification and vertical integration, timberland ownership strategy was historically seen as an important determinant for future success in the forest industry (O'Laughlin and Ellefson, 1982). Technological development and the emergence of alternative fiber sources has challenged this idea so that pulp producers dependent on the availability of virgin fiber are more likely to be keen to own or control forests by themselves in comparison to companies oriented toward paper or energy production. Thus, our third research question is: Does orientation to pulp, paper or energy production influence the choice of timberland ownership and control?

The TCE driven motivation for vertical integration is more likely to occur for more complex inputs which are frequently traded, and when the institutional environment within which the firms operate is classified as being uncertain. Lack of vertical integration can form a barrier to entry for potential competitors by forcing them to enter into both input and production stages of value chain by leaving the local wood markets thin for their competitors (O'Laughlin and Ellefson, 1982; Li and Zhang, 2014). In other words, in countries that do not have established roundwood markets, the control over forests might be emphasized because access to forest resources is hard to substitute with any arrangements (Yin et al. 2010; Niquidet and O'Kelly, 2010; Lönnsted and Sedjo, 2012). Previous studies on timberland ownership and vertical integration have concluded that in North America and the Northern Europe with mature markets and well-established property rights, the wood is mostly efficiently supplied through the market (Lönnsted and Sedjo, 2012; Li and Zhang, 2014). In the United States, for example, the reorganization is characterized with long-term wood-supply agreements between new and established owners (e.g. Flynn and Pahkasalo, 2015). Therefore, it is reasonable to claim that the reorganization of timberland ownership in North America or Europe has not caused significant shortage in the availability of wood for the industrial purposes. However, as the institutional forest owners are driven by fairly short-term (8–10 years) financial motives, their decisions may have implications on wood supply in the long-term, for example through decreased inputs for research on improving forest growth and yield (see Flynn and Pahkasalo, 2015). In the regions that the long-term supply agreements are not common, the reorganization of timberland ownership can cause uncertainty in wood supply. For example, as Flynn and Pahkasalo (2015) describe in Australia some of the eucalyptus plantations acquired by TIMOs will be converted to agriculture after the first rotation cycle, with a possibility that similar development will take place in as much as one-third of Australia's eucalyptus plantations. Thus, due to emerging differences across geographic regions our fourth research question is: Do pulp and paper companies' timberland ownership and control strategy against the

Table 2 Breakdown of data on vertical integration status of top 100 forest companies. Firms' forest ownership status

Firms' vertical integration status

Frequency Have Ownership No Ownership Missing

Timberland for conservation and other uses

Frequency 40 53 7

Have vertical integration No vertical integration Missing

Frequency 51 45 4

Have forest other than industrial use No forest other than industrial use Missing

16 80 4

42


Table 3 Cross-tabulation of firms' headquarters location and location of timberland ownership or control.

Table 4 Presence of domestic and international forest companies at individual country level and area owned and controlled (based on authors' own calculation of data sample).

Forest location North America Headquarter North America South America Europe Asia Africa Oceania Total

South America

Europe Asia Africa Oceania

16

3

1

1

0

1

0

6

0

0

0

0

1 3 0 0 20

5 4 0 0 18

11 0 1 0 13

1 9 0 0 11

0 3 2 0 5

1 7 0 0 9

company background characteristics differ between Europe or North America, and the rest of the World? 3. Data and methods This study is based on a sample of forest industry firms which are listed on the top 100 Global Forests, Paper & Packaging Industry Survey (PricewaterhouseCoopers, 2013). Corporate operational information concerning company background (size, financial performance), business orientation (pulp, paper or energy production), location, and timberland ownership and control status (for specific indicator descriptions see Table 1) in 2012 has been collected by browsing the most recent reports by PricewaterhouseCoopers, Pulp and Paper International magazine, corporate financial reports, corporate sustainability reports, and other public sources. In addition, information on the breakdown of companies that are vertically integrated on different continents is provided, categorized by their headquarter location. Further, the timberland ownership of the domestic and international companies at individual country level is described whenever it brings additional insight. The estimation of logistic regression models was used to test the significance of corporate background characteristics, namely corporation size, financial performance, and business segments, on the dichotomous choice of industrial timberland ownership and control. The choice of timberland ownership and control was measured so that the dummy variable takes the value of 1 when the firm is vertically integrated to timberland and is 0 when the firm is not integrated. The probability of a firm's choice to vertically integrate (P(yi = 1 | xi) = F(xi'β)) was modeled by the natural logarithm (ln) of the odds of choice as follows: logit ðpÞ ¼ ln ðp=1−pÞ

Companies with timberland ownership and control

International companies with timberland ownership and control

Reported area (mha) under industrial ownership and control

Africa South Africa

6

3

1.10

Asia China India Indonesia Laos/Thailand South Korea Thailand Vietnam

7 2 2 2 1 2 1

3 0 1 2 0 1 1

1.90 0.40 0.04 0.04 0.25 b0.01 b0.01

2

2

0.03

1 1 4 3

0 0 4 0

0.90 b0.01 2.60 3.40

10

4

38.8

12

3

4.20

South America Argentina Brazil Chile Colombia Uruguay Venezuela

2 13 4 1 5 1

2 9 2 1 5 1

0.30 3.80 1.90 0.10 1.20 0.02

Oceania Australia New Zealand

6 3

6 3

0.60 0.06

Europe Estonia, Lithuania and Latvia Finland France Russia Sweden North America Canada (leasing/licensed) U.S.

Our final sample consists of 99 companies, which could be considered as a small sample size. Since the maximum likelihood estimators in the logistic regression may be biased, non-normal, and inefficient in the presence of small samples (Tsagkanos, 2008), bootstrapping is used to verify the standard errors of the coefficients to obtain robust estimates.

ð1Þ 4. Results

where p is the probability of the choice of vertical integration while 1-p is the probability of the choice of no vertical integration. Along with the transformation, the linear function of the model is: logit ðpÞ ¼ Xβ þ μ;

ð2Þ

where X is the independent variables matrix, β is the estimated coefficients vector, and μ is the error term vector. Further, the model is used to examine whether determinants of the choice of timberland ownership and control varies between regions. The first sub-sample focuses on those companies that have decided to vertically integrate in North America and Europe (1), which have long traditions in the forest industry. The second sub-sample (2) is those who have decided to integrate in Africa, Asia, Oceania and South America (The rest of the World) which industrial forest ownership and control strategies have not yet been studied from a firm perspective. In sub-samples 1 and 2, the dummy variable value 1 represents vertical integration in regions and 0 is no integration.

4.1. Descriptive results The majority of the largest companies in the forest industry have timberland assets in multiple countries on multiple continents. Among these companies, 51 reported timberland ownership or direct control in 2012. Forty-two percent of the timberland owned/controlled by companies was located on a different continent than the company's headquarters, indicating a high degree of international diversification.1 In total, 40 companies reported direct ownership in different continents in 2012, accounting for 16.1 million ha globally (see also Fig. 1). At the global level, companies reportedly owned about 20.0 mha of timberland, while the location of approximately 4.0 mha remained unspecified. The total forest area reported as owned, controlled or managed by the companies was about 66.0 mha in 2012, of which 38.0 mha was located in Canada, where most of the land is owned by the 1 Data are based on the counting by number of companies, not on the actual timberland areas as these are not systematically reported.


4.2. Results from the logistic regression model

Table 5 Means, standard deviations, and the VIF multicollinearity test.

Size Financial performance Pulp Paper Energy

43

Mean

S.D.

VIF

5741 0.12

5983 0.09

1.29 1.07 1.14 1.12 1.16

government and only 7% of the total forest area is under private forest ownership. When compared to situation in year 2007, the total area of industrially owned and controlled timberland among the top 100 companies actually increased based on the available data. According to the data, the timberland investment flows into Africa, Asia and South America grew between 2007 and 2012, whereas investments in Oceania, Europe and North America remained stable. Table 2 shows the descriptive statistics of timberland ownership status of the top 100 forest companies, among which 40 have ownership and 51 are involved in timberland integration through either direct ownership or leasing arrangements. In addition, 16 companies report having timberland for other purposes, such as nature conservation. Table 3 shows the connection between the locations of the corporate headquarters and their timberlands, revealing that vertically integrated companies are most active in their headquarters continent. Besides, North American and European companies are comparatively more active in timberland ownership and control in South America than in the other regions. Interestingly, Asian companies not only possess timberlands in Oceania, but have also expanded their ownership and control into North and South America, and Africa. In general, companies from North America and South America are most frequently vertically integrated, while timberland ownership is comparatively less common in Europe, Asia and Oceania. Table 4 demonstrates the presence of domestic and foreign companies at individual country level. Large countries such as Canada, the U.S., and Brazil have attracted many foreign and domestic companies. More than ten companies have timberland ownership or control in each of these countries. Four foreign companies report timberland leasing in Russia. In Europe and North America, the majority of the companies with timberland ownership or control are domestic, whereas in South America and Oceania international companies are represented more.

Table 5 shows the means and standard deviations of the variables. A Z-score transformation is used to standardize the values of size and financial performance, since these two variables are measured on widely different scales (see Table 1). Based on this, there is no risk of multicollinearity between the independent variables (excluding dummy variables) as measured by the VIF index. The results in Table 6 demonstrate the effect of company size and financial performance on the choice of vertical integration as measured by timberland ownership or control in total sample (model 1), and in two sub-samples (models 2 and 3). Generally, the Nagelkerke R Square value (0.40) shows an acceptable ratio of goodness of fit for the model 1. More specifically, company size has a positive beta coefficient (0.53) and is significant at the 0.1 level, which indicates that for a one-unit increase in size, the expected change in the choice of probability (vertical integration)/probability (no vertical integration) is 1.69. Similarly, financial performance as measured by EBITDA has a positive beta coefficient (0.60) and is significant at the 0.05 level, indicating that for a one-unit increase in profitability, the expected change in the choice of probability (vertical integration)/probability(no vertical integration) is 1.82. Thus, a larger and more profitable company has a stronger preference for timberland ownership or control. The Hosmer and Lemeshow diagnostic test in this model is insignificant (p = 0.31 N 0.05), which shows no difference between observed and predicted value of variables, indicating the homoscedasticity of the model. Bootstrap logistic regression (resampling = 500) has also been applied to see whether the asymptotic standard errors generalized from the maximum likelihood estimate are correctly estimated in the small sample (Table 7). As the bootstrapped standard errors are either similar or smaller than the asymptotic standard errors, we conclude that the estimates are robust. Although the variation in the standard error of the energy segment is large, it does not affect the results at all as the energy segment is statistically insignificant in the model. Data from 30 companies in Europe and North America show that there is forest ownership or control in these regions. Model 2 in Table 6 shows that financial performance and business segments (classified into paper, pulp or energy) impacted the choice of vertical integration in Europe and/or North America. Generally, the Nagelkerke R Square (0.31) shows a good ratio of goodness of fit for the model. Specifically, size has a positive beta coefficient (0.58) and is significant at the 0.05 level, which indicates that a one-unit increase in company size produces

Table 6 Logistic regression of the choice of timberland ownership and control in the total sample and in the subsamples (N = 99).

Independent variables

Total sample

Europe and North America

The rest of the world

Model 1

Model 2

Model 3

B

Exp(B)

Size

0.53


0.60

Paper orientation

0.24

Pulp orientation

1.92

Energy orientation

1.32

Constant Nagelkerke R Square Hosmer and Lemeshow Test Specificity Sensitivity Overall % correct

−1.10

1.69* (0.29) 1.82** (0.29) 1.27 (0.62) 6.84*** (0.54) 3.75 (0.93) 0.33 (0.59) 0.40 0.31 72.50 78.30 75.60

B

Exp(B) 0.58 0.33

−0.06 0.91 1.99 −1.46

*,**,*** indicate statistical significance at 0.1, 0.05, and 0.01 levels, standard errors are presented in the brackets.

1.79** (0.26) 1.40 (0.27) 0.94 (0.60) 2.47* (0.54) 7.28*** (0.77) 0.23** (0.60) 0.31 0.64 92.90 50.00 77.90

B

Exp(B) 0.68 0.36 0.35 1.37

−1.13 −1.80

1.97* (0.35) 1.43 (0.24) 1.42 (0.70) 3.95** (0.62) 0.33 (0.92) 0.17** (0.71) 0.22 0.79 94.00 35.00 77.10

44


Table 7 Statistics for R = 500 bootstrapped logistic regression of the choice of timberland ownership and control in total sample, and in the subsamples. Coefficient Sample Total sample Europe and North America The rest of the world

Asymptotic standard error Bootstrap standard error (R = 500) Asymptotic standard error Bootstrap standard error (R = 500) Asymptotic standard error Bootstrap standard error (R = 500)

Size


Paper orientation

Pulp orientation

Energy orientation

Constant

0.29 0.31 0.26 0.30 0.35 0.35

0.29 0.29 0.27 0.28 0.30 0.30

0.62 0.65 0.60 0.65 0.70 1.02

0.54 0.58 0.54 0.56 0.62 0.61

0.96 3.74 0.77 1.16 0.92 1.36

0.59 0.60 0.60 0.68 0.71 1.04

an expected change in the choice of probability (vertical integration in Europe and/or North America)/probability (no vertical integration in Europe and/or North America) of 1.79. As against the total data set, financial performance has no significant impact on the choice of timberland integration in Europe and North America. Regarding the product segments, pulp and energy orientation have a significant positive impact on the choice (0.1 and 0.01 significance levels respectively). Thus, again, the larger companies and those operating in the pulp and energy business segments would seem to prefer vertical integration. The value of the Hosmer and Lemeshow test (p = 0.64 N 0.05) indicates that there is no difference between the observed and predicted values of variables. Bootstrap logistic regression (resample size 500) was further applied to the sub-sample (Table 7), indicating that standard errors increased through the resampling process. However, the Wald statistics are significant at the 0.1 level for variables measuring size, pulp, and energy orientation, suggesting that the statistical diagnoses are still robust in this model. Similarly, analysis was conducted on vertically integrated companies in the rest of the World sub-sample including South America, Asia, Africa, and Oceania. Altogether 31 companies were found to have timberland ownership or control in these regions. The model 3 in Table 6 shows that size and business segment (indicated by paper, pulp, and energy) significantly impacted the choice of vertical integration. Generally, the Nagelkerke R Square (0.22) shows a good ratio of goodness of fit for the model. Specifically, company size has a positive beta coefficient (0.68) and is significant at the 0.05 level, which indicates that a oneunit increase in size would produce an expected change in the choice of probability (vertical integration)/probability (no vertical integration) of 1.97. Financial performance has no significant impact on the choice of vertical integration in these regions. As to the product segments, a focus on pulp has a positive impact on the choice of vertical integration at the 0.05 significance level. Thus, there is a very strong preference for vertical integration in these regions when company size increases and has business operations in the pulp segment. The value of the Hosmer and Lemeshow test in this model is insignificant (p = 0.79 N 0.05), indicating that there is no difference between the observed and predicted values of variables. The bootstrap logistic regression (R = 500) shows that the bootstrap standard errors mainly increase through the resampling process (Table 7). However, the p-values for Wald statistics remain significant for variables indicating company focus on pulp production and measuring size, indicating that the statistical diagnostic tests are still robust in this model. 5. Discussion To contribute to the scarce literature on organization and management strategy of forestry and forestry industry in a global context, our first research question was to explore the global state of industrial timberland ownership and control among top 100 forest, paper and packaging companies. The total area of industrial timberland among top 100 companies has increased from 2007 to 2012 due to growth of activities in the emerging regions, despite the fact that many vertically integrated forest product companies have sold the majority of their forests,

for example, in the USA and Europe during the last in 25 years (Sun et al., 2013; Li and Zhang, 2014). Based on our analysis, companies from different continents vary in their ways to organize timberland ownership and control. The scientific literature on timberland ownership has focused primarily on North America and the Nordic countries until now. With the changing industrial production capacity at global level, the results of this study indicate the need to evaluate forests as a strategic asset beyond those regions. In parallel with accelerating rate of globalization, the questions related to firms forest ownership and control strategies become increasingly international. The individual countries with largest production capacities, such as Brazil, Canada, and the U.S., have been the most attractive destinations for timberland investment among forest companies. In contrast, for example in Russia, despite its abundant forests, top 100 forest companies reported controlling or managing less timberland (2.6 mha) than in Sweden (3.7 mha). In practice, forest companies have tended to acquire timberland ownership or control mainly from their home (headquarters) continent. In terms of international investments, South America has attracted a fairly balanced flow of forestland investments from companies based on all different parts of the World. In South America, 12 out of 18 vertically integrated companies were found to originate from other continents, whereas in Asia only two of 11 such companies were non-Asian. Region-wise, Asian companies have been the most active in terms of global expansion, especially in Oceania, where seven out of nine international companies are headquartered in Asia. Additionally, three out of five vertically integrated companies in Africa are headquartered in Asia, while companies from other continents did not report timberland ownership and control in Africa at all. On one hand, this pattern of active vertical integration into timberland among Asian companies might be a reflection of the predominantly resource-seeking motives of companies as suggested in Hobdari et al. (2007) or Zhang et al. (2014). On the other hand, if Africa is able to unlock its economic potential in the future, Asian companies already active in the continent may have a competitive advantage in responding to increased demand for forest products because of their access to forest resources. This possibility would warrant studying global industrial timberland ownership and control of strategies also from a perspective of strategic management and corporate foresight. As the strategic asset-seeking investments from emerging economies have already increased their importance in global investment base (e.g. Gammeltoft et al., 2012), it would be especially interesting to study the industrial forest ownership and control strategies focusing on companies from those emerging regions. Regarding research questions two and three, the logistic regression analysis estimation results indicate that larger company size and orientation to pulp-production increases the likelihood for a company to be vertically integrated into timberland. This supports the idea that larger companies have more flexibility to organize their sourcing strategies, and are not so easily divesting their timberland assets for gaining short term improvement in their financial performance (see e.g. Flynn and Pahkasalo, 2015). An alternative explanation for the observed positive relationship between size, profitability and the choice of vertical integration may be that by integrating into timberland larger firms can secure a steady flow of raw material to their mills and reduce


their dependency on local wood markets (see e.g. Yin et al., 2000; Lönnsted and Sedjo, 2012; Li and Zhang, 2014). This is particularly important in the production of pulp, as even short breaks in the production of a modern pulp mill could cost millions of dollars. Regarding our last research question of whether the studied background characteristic affect differently the timberland integration decision in North America and Europe compared to the rest of the world, the answer is negative for the all other characteristics except for the energy production orientation. In the subsample for Europe and North America, the greater focus on energy production increased the likelihood of company being vertically integrated, but in the other regions the effect was not statistically significant. This result suggests to pay more research attention to how companies adjust to the prospective challenges related to availability of forest resources due to the increased global demand of energy and more diversified production portfolios that are foreseen in the bioeconomy era (see, e.g., Pätäri et al., 2015). While the results of this study are valuable in describing the state of timberland ownership among the top 100 forest companies and in helping to understand the industrial strategies concerning vertical integration against their organizational background characteristics, some major limitations in terms of data and analysis exist. One limitation of this study is that it does not assess linkage between the timberland integration decision and the ratio of wood sourced from the controlled forests in the total use of wood. The assessment of the detailed wood procurement strategies of firms, their financial performance and forest related factors (e.g. species, rotation ages) would require to limit the study only on very few companies that provide sufficient information. Additionally, it was impossible to retrieve information on the exact size and location of the timberland assets from publicly available sources. Therefore, we were not able to control for the actual size and type of timberland holdings as variables in the models, but as a simple binary choice between company being vertically integrated to timberland or not. Another limitation of this study is that categorization of different types of timberland owners was inevitably incomplete. Our sample includes a few companies that can also be classified as REITs, but are nevertheless listed among the top 100 forest industry companies (e.g., Weyerhaeuser, Rayonier). Fernholz et al. (2007) and Zhang et al. (2012) pointed out that the various types of industrial timberland owners have different motivations and responsibilities, which may have some impact on forest management and the environment in the long-term. More research is needed to understand the actual impacts of the reorganization of timberland ownership on roundwood prices and timber supply in different institutional environments (suggested also by Zhang et al., 2012). Lastly, timberland investment decisions at the country level are driven by the policies such as taxation, and by systematic risk that is created or affected by general economic features, such as exchange rates, interest rate, and other financial factors, but assessment of those factors on the firm level decision to integrate into timberland goes beyond the scope of this study. Finally, studying managerial decision-making regarding timberland investment strategies, based for example on qualitative case approach, would provide fruitful avenues for better understanding of the internal, firm-level insights in terms of future development in timberland ownership and control strategies.

6. Conclusions This is the first firm-level study attempting to explore the global state of industrial timberland ownership, choice of vertical integration strategy and the effects of corporate background characteristics on this choice. The originality of this paper also derives from the fact that the reorganization of industrial timberland has been described to “have changed the way in which the forest industry operates” (Flynn and Pahkasalo, 2015, p. 4), and the global timberland ownership

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structure has so far received negligible scholarly attention (see, e.g., Bliss et al., 2010). Despite the recent wave of divestments in North America and Northern Europe, the reported timberland area in the ownership and control among the sample of top 100 forest industry companies was found to increase between 2007 and 2012 due to growth of activities in emerging countries. In the future, it is also likely that with the expected economic growth in emerging countries, the reorganization of global forest ownership will continue, and there is a need for more scholarly attention to address these changes and their implications at firm, societal and global level. In a dynamic market situation with increasing competition over arable land, more research is required to understand the interplay between global strategies across different forest industry companies, and between forestry and other players (whether in mining or agriculture). In the future, this may suggest further implications on the sustainable timberland ownership strategies among forest companies and also merits future research from the forest economic and policy points of view. Acknowledgements We are grateful for valuable comments received from professor emeritus Jari Kuuluvainen and Dr. Rajat Panwar, as well as from two anonymous reviewers of this journal on an earlier version of this paper. Financial support from Metsämiesten Säätiö Foundation (grant 14TU129KE) is gratefully acknowledged. References Barney, J.B., 1991. Firm resources and sustained competitive advantage. J. Manag. 17, 99–120. Barua, S.K., Lehtonen, P., Pahkasalo, T., 2014. Plantation vision: potentials, challenges and policy options for global industrial forest plantation development. Int. For. Rev. 16 (2), 117–127. Bliss, J.C., Clover Kelly, E., Abrams, J., Bailey, C., Dyer, J., 2010. Disintegration of the U.S. industrial forest estate: dynamics, trajectories, and questions. Small scale For. 9 (1), 53–66. Bull, M., Bazett, O., Schwab, S., Nilsson, A., White, S., 2006. Industrial forest plantation subsidies: impacts and implications. Forest Policy Econ. 9 (1), 1–3. Clutter, M., Mendell, B., Newman, D., Wear, D., Greis, J., 2005. Strategic factors driving timberland ownership changes in the U.S. South. (Online] Available from) www.srs.fs. usda.gov/econ/pubs/southernmarkets/strategic-factors-and-ownership-v1.pdf (accessed 11 March 2015). Coase, R.H., 1937. The nature of the firm. Economica 4, 386–405. Cossalter, C., Pye-Smith, C., 2003. Fast-wood Forestry—Myths and Realities. Center for International Forestry Research, Bogor, Indonesia (50 pp.). Cubbage, F., Koesbanda, S., MacDonagh, P., Balmelli, G., Olmos, V.M., Rubilar, R., de la Torre, R., Hoeflich, V., Murraro, M., Kotze, H., Gonzalez, R., Carrerro, O., Frey, G., Turner, J., Lord, R., Huang, J., MacIntyre, C., McGinley, K., Abt, R., Phillips, R., 2010. Global timber investments, wood costs, regulation, and risk. Biomass Bioenergy 34 (12), 1667–1678. Deininger, K. and D. Byerlee, with J. Lindsay, A. Norton, H. Selod and M. Stickler. 2011. Rising Global Interest in Farmland: Can it Yield Sustainable and Equitable Benefits? Washington DC: World Bank. (Available from http://econ.worldbank.org/external/ default/main?pagePK¼64165259&theSitePK¼469382&piPK¼64165421&menuPK ¼64166322&entityID¼000334955_20110208033706 Accessed 10 January 2015). Desmond, H., Race, D., 2000. Global Survey and Analytical Framework for Forestry Outgrower Arrangements. Food and Agriculture Organization of the United Nations (FAO), Rome, Italy. Evans, T., Hunsberger, C., Aide, T.M., Albaladejo Montoro, J., Borras Jr., S.M., del Valle, H.F., Devisscher, T., Jabbour, J., Kant, S., López-Carr, D., Masundire, H., Pricope, N.G., Sanchez-Rodriguez, R., Abdelhamid, M.T., Alfthan, B., Ayache, F., Berhe, A.A., Chinweze, C., Frelichova, J., Hislop, L., Pan, W.K., Schulte-Herbruggen, B., Smith, J., Souza Jr., C., Timmins, T.L., Zulu, L.C., 2012. Part I: Assessment of the State and Trends of the Global Environment. Chapter 3: Land. Fifth Global Environmental Outlook (GEO-5)United Nations Environment Programme (UNEP), Nairobi, pp. 65–96. Fernholz, K., Bowyer, J., Howe, J., 2007. TIMOS & REITS: What, why, & how They Might Impact Sustainable Forestry. Dovetail Partners, Inc., Minneapolis, MN (13 pp.). Flynn, R., Pahkasalo, T., 2015. Institutional forestland Ownership and its Effects on Forest Products Markets. Forest Products Annual Market Review 2014–2015. UNECE, Geneva. Gammeltoft, P., Filatotchev, I., Hobdari, B., 2012. Emerging multinational companies and strategic fit: a contingency framework and future research agenda. Eur. Manag. Rev. 30, 175–188. Gerber, J.-F., 2010. Conflicts over industrial tree plantations in the South: who, how and why? Glob. Environ. Chang. 21, 165–176.

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