In Europe, Greater Variety Implies Greater Complexity
By Andreas Dressler
Anyone following the news about Europe in the past couple of years may have gained a dismal impression of the continent’s economic situation. A never-ending financial crisis, growing public sector debt, countries on the verge of bankruptcy, stagnant growth or recession, high unemployment and political gridlock. Can a region so seemingly plagued by problems still be an attractive location for foreign direct investment (FDI)? The answer, in short, is yes.
Foreign investment into Europe is changing and there a number of factors that have been driving these developments. Here is how these trends could affect U.S. companies considering an investment in Europe.
According to data from the United Nations Conference on Trade and Development (UNCTAD), FDI into Europe fell by two-thirds between 2007 and 2010. Europe’s share of global FDI inflows declined from 45 percent to 25 percent during the same period. UNCTAD’s data show a similar pattern for almost all individual countries in Europe, including both the “old-Europe” states of Western Europe as well as the previously fast-growing economies of Central Europe and Eastern Europe.
Although comparable full year data for 2011 was not yet published by UNCTAD at the time this article was written, other sources and the author’s own experience suggest that a recovery in foreign investment is firmly in place.
A look at some of the recent announcements of investments in to Europe shows a very large number of sales and marketing operations as well as European headquarters being established by international companies that are still relatively new to the region or investing in Europe for the first time. A remarkably large number of these investments are being made by fast-growing and increasingly well-funded U.S. technology companies establishing their first presence outside of the United States.
U.S. technology companies in particular continue to favor the UK as the place for their first European operations or headquarters. Although other locations on the continent such as Switzerland or the Netherlands offer attractive conditions for headquarters projects, the majority of U.S. companies still tend to favor the UK due to its open business environment and cultural similarity to the United States.
Another beneficiary of the increase in U.S. technology investment is Ireland. Ireland was hit particularly hard by the global financial crisis and the bursting of its own domestic real estate bubble. A favored location for foreign companies since it slashed corporate tax rates in the 1980s; foreign investment in Ireland dropped during the crisis but has now bounced back. Twitter is currently setting up its international headquarters in Dublin. It joins Google, Facebook and eBay, all of whom have international operations centers in Ireland employing more than 1,000 staff each. John Bolton, a vice president at Ireland’s Industrial Development Authority (IDA Ireland) in Dublin, remarks, “In some ways, the financial crisis has made Ireland even more attractive for investors by bringing business costs down. The fundamental advantages of Ireland are still the same and foreign companies are finding that they are getting great value for money by coming to Ireland now.”
A review of recent investments into Europe also shows that greenfield manufacturing projects tend to be the exception. This does not imply an absence of manufacturing activity, but most manufacturing investments are expansions of existing facilities in Europe by companies who have had a presence there for several years. In the pharmaceuticals industry, for example, Amgen, Mylan and Genzyme have all announced plans to expand existing pharmaceuticals manufacturing facilities in Ireland.
These projects reflect one of the key factors driving investment into Europe. Although economic growth may be slow compared to countries such as China or Brazil, Europe still remains one of the world’s largest — and most stable — markets for many products and services. Especially for companies whose products and services are geared toward more affluent, tech-savvy or demanding customers, Europe is still one the best places to invest.
Another factor that has been driving recent investment into Europe is the availability of specialized talent and skills. Companies that thrive on innovation have found that Europe continues to offer a strong pool of highly qualified employees and university graduates. Recent examples of companies taking advantage of these capabilities include General Electric, which is investing EUR 30 million in expanding its research and development operations in Germany, and Intel’s decision to establish a supercomputer lab in Barcelona (Spain), its fourth supercomputer research center in Europe in addition to those in Paris, Jülich (Germany) and Leuven (Belgium). Overall, Intel operates 25 R&D centers in Europe employing more than 1,500 professionals.
Another area where Europe is seeing growing investment is in business process and information technology outsourcing (BPO and ITO). As European companies increase the amount of work outsourced to third parties, outsourcing providers from the United States and India have been expanding their European service delivery footprints, often opting for some of the lower cost EU countries such as Romania or Bulgaria. Poland, in particular, has seen a surge in this type of investment during the past year, as well as a large number of new investments by companies establishing shared services centers (SSCs). Examples of companies announcing new or expanded SSCs or BPO centers in Poland during the past 12 months include Bridgestone, Cisco, State Street and Indian outsourcing provider Infosys.
Emerging Economies Select European Locales
The increased presence of Indian companies points to another development that has led to a recovery of FDI in Europe, which is the growth in investment by companies from emerging markets. Chinese companies in particular have been focusing on Europe as a key part of their international expansion strategies. While much of this investment has been in the form of acquisitions, including numerous takeovers of European companies still struggling from the last economic downturn; Chinese companies have also been establishing their own manufacturing plants in Europe as well as headquarters to manage their growing presence in the region. Chinese packaging company GA Pack, for example, is investing EUR 50 million to build a manufacturing plant in Halle (Germany) and previously opened a European headquarters in Winterthur (Switzerland).
One of the European regions that anticipated this development is the German state of North Rhine-Westphalia. The state-owned economic development agency NRW.INVEST has three offices in China (in addition to offices in India, Japan, Korea, Turkey and the United States), responsible for helping investors to set up in Germany’s most populous state. Says Petra Wassner, CEO of NRW.INVEST, “We recognized several years ago that China would become a major source of investment and we began very early to position North Rhine-Westphalia as the best place in Europe for Chinese companies to invest.” This strategy is paying dividends, with more than 750 Chinese companies already calling North Rhine-Westphalia home, and 53 new Chinese investors setting up in 2011 alone. “We believe this is just the beginning,” Wassner adds. “We expect investment from China to keep growing as Chinese companies seek access to European markets and know-how.”
The ease with which Chinese companies have gained a foothold in Europe also reflects a trend that often goes unnoticed in the U.S. media. During the past decade, most European countries have reduced taxes, cut red tape, and kept business costs under control in response to global competition. It is safe to say that much of Europe has become business friendlier in recent years. As an example, almost all of the countries in the world that have introduced a flat tax — a concept originally developed in the United States — are countries in the eastern part of Europe or the former Soviet Union. In most cases, tax rates in these countries are very low, which has prompted other previously high tax nations in Western Europe such as Germany to lower their taxes in order to remain competitive.
These differences also highlight a key message for U.S. companies planning to establish a presence in Europe. Although “Europe” is often referred to as a single entity, the continent is by no means a homogenous region. Even within the 27 countries of the European Union there are huge differences in terms of economic and political structures, growth rates, infrastructure, regulations, and attitudes toward business and market opportunities. It would also be mistaken to believe that Europe is static and not changing. While change may occur more slowly than in some of the emerging markets, much of Europe continues to transform itself and adapt to new global economic realities.
For the company considering investment in Europe, these differences offer a greater variety in terms of business opportunity and location alternatives. Greater variety also implies greater complexity and the need to be more prepared and careful in selecting the right place in Europe to invest.
Andreas Dressler is managing director of Terrain, a foreign direct investment advisory firm based in Berlin, Germany. He can be reached at email@example.com.