Next to the United States, Europe is probably the world's most stable marketplace. Yet it is anything but stagnant. The dismantling of trade barriers, introduction of a common currency, and emerging markets in Central and Eastern Europe present unique opportunities to U.S. companies.

Many executives have realized this and are either setting up first-time operations, or expanding existing ones, in Europe. In fact, around 47 percent of all US outbound investment ends up in Europe.

Yet Europe, despite its drive toward harmonization, confronts them with a myriad of pitfalls and opportunities. Doing business in Europe is still quite different from the United States.

The myth of country competitiveness

Achieving competitive advantage has always been a key objective of global management strategy.

Companies that locate facilities in a country solely on the basis of low cost structures often have seen their ability to compete from this location restricted by issues such as rising wages, difficulties in managing the value chain and increasing pressure from competitors. Rather than seeking comparative advantages, corporations should aim for locations that allow them to achieve competitive advantages.

Management guru Michael Porter defines this as the ability to develop long-term benefits, such as, continuous developments in innovation and/or productivity gains. Clearly, some regions in Europe make better fits than do others, but the key question is whether a certain location will offer a competitive advantage for your business.

Imagine you have to decide where to locate your company's European headquarters (EHQ). Around 70 percent of all EHQs are located in one of the following metropolitan areas: Amsterdam, Brussels, Frankfurt, Geneva/Zurich, London and Paris.

Today, most corporations still include these "usual suspects" in their search area when evaluating EHQ location options. Yet, we also find that a second tier of potential EHQ locations has popped up, and that the upcoming EU membership of various Central and Eastern European countries is leading to yet an additional league.

Our experience further reveals that, beyond cost factors, companies tend to evaluate an increasing number of business performance factors. The main categories are political/economic environment, human resources, operating environment, and accessibility. Still, it is not unusual to find executives assessing over 40 data points to quantify these factors.

In addition, corporate site selection teams will attribute different weights to the criteria, and the main categories of business performance factors.

As a result, there potentially are as many 'best locations' for business as there are companies. The first step to finding yours is to carefully identify your project's location drivers.

A Method to the Madness

The basic decision-making process to select a site in Europe is little different from the one you would apply in the United States. However, the European operating climate typically varies more within a 60-mile radius than it does coast to coast in America.

As a rule of thumb, the process takes about twice the time and triple the effort. To illustrate this point - it took us as much effort to investigate 330 Metropolitan Statistical Areas to locate a consolidated medical warehouse within the United States as it did to assess 22 cities throughout Europe for a shared services center of a U.S.-based chemical company.

From this perspective, site selection in the United States is straightforward, as up-to-date data on cost and quality is widely available. Various vendors can assist site selectors with completing comparisons.

Data is comparable and well-defined for the whole country. If the data is not available, local economic development organizations are usually well equipped and professional in handling information requests.

In Europe, the challenge is to find the right data provider, to reuse any data to achieve comparability, and to further define it on a pan-European level. In fact, available data is often regional or national in nature, and definitions differ between regions and certainly between nations. Bringing those to a common denominator is a daunting task.

The EU's statistics office (EuroStat) employs over 710 persons to gather data on the 15 member countries.

Another difference with the United States is that data are not necessarily available on a city level either. Furthermore, data are not as up-to-date as most site selectors would prefer.

European Union grows eastward

Europe is much larger than the European Union (EU) formed by 15 sovereign nations. The EU, however, is Europe's economic powerhouse, and is expanding at an ever-increasing pace.

It took 15 years for the UK, Ireland and Denmark, as the first 'newcomers', to join the EU's six original countries (Belgium, France, Germany, Italy, Luxembourg, the Netherlands) in 1973. Greece followed in 1981 and Portugal and Spain accelerated the enlargement pace in 1986. The next expansions in 1995 included Finland, Austria and Sweden.

The next expansion will be to the east. According to some, it could start as early as 2004 with Bulgaria, the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovak Republic, Slovenia and Turkey.

The interesting point for business is that in preparation for the actual accession of these nations to the EU, their governments are already putting into force much of the legislation that is commonplace within the Union.

The Euro

As of Jan. 1, 2002, over 300 million Europeans, or 80 percent or the European Union's total population, started exchanging their old currencies for the new euro. The EU introduced the euro as a giral payment facility back on Jan. 1, 1999, and the unit started appearing between brackets next to the 'real currencies' on price-tags and salary slips across Europe since that time.

Initially, only businesses and banks could actually use the currency to settle payments, but the "dress-rehearsal" is definitely over. The speed at which Europeans from Finland to Sicily rushed to jettison their historic symbols of independence, such as the German Mark, French Franc, and Guilder for the new coins and bills startled everyone.

For business, the euro is both a blessing and a curse. The upside is that the intricacies of having to deal with over 15 currencies in an area one-third the size of the United States are now over. Only the Sterling, Swedish Crone and Danish Crone hold out, at least for now, yet most international businesses in those three countries also use the euro for their European trade.

The euro, poised to become the world's second international trading currency after the U.S. dollar, should also offer more stability and lower interest rates.

Another benefit is that the euro makes identifying suppliers across Europe easier; after all, their prices are now fully comparable.

That also leads us to the euro's downside. If your buying department now faces a more transparent market because of a common currency, so does your client.

Significant price differentials still exist for both consumer and industrial products across the 12 countries that adopted the euro.

The expectation is that eventually, buyers will only accept such differences if they are commensurate with better service or product performance

Diversity still reigns

Despite the common euro currency, markets across Europe will continue to show significant differences. There is a trend toward an assimilation of consumer tastes and business practices. Yet, consumers and buyers still have a tendency to favor products and services that have a local flavor.

Many corporations find that at least 50 percent of their product range has identical features across the Europe. It is not uncommon to find industries where the country-to-country product overlap is even higher than 75 percent. This makes a great case for a pan-European approach, where products are localized by changing the packaging or by ensuring that the instruction manual features the right language.

Even the producers of common products - like sneakers, aspirin, or televisions - find themselves considering how to tackle each market. Historic business practices may lead to totally different business environments from one country to the other.

Incentives - don't take them for granted

Unlike the U.S. government, the European Commission sets strict regulations on what type, how much and where incentives can be offered. This does not only affect the business within the 15 EU countries, but also those of Liechtenstein, Iceland, Norway, Switzerland and the countries that are candidates to join the EU in the coming decade.

The overriding principle is that - with a few exceptions - incentives (and other forms of state aid) distort competition between countries and private enterprise, and that they therefore are illegal. Organizations, for example, cannot sell land below fair market value, unless the price reduction qualifies as an authorized form of state assistance. Along similar lines, many fiscal incentives have now become subject of intense EU scrutiny, as they are stated to distort competition between countries as well.

Yet, incentives are allowed under specific conditions. If a country or region is depressed economically, then companies are more likely to receive incentives for locating there. The regulations that specify the exact conditions are fixed for the 2000-2006 period, but will be updated thereafter.

The potential danger for U.S. companies is that the EU's executive holds the recipient of illegal incentives in fault. Across the EU, numerous corporations have been forced to repay incentives, without the possibility to reclaim the damages from the authorities that initially granted them.

The list of corporate 'victims' to the EU claw back scheme includes blue chip names such as BF Goodrich, Kimberly Clark, SCI, Siemens and Toyota.

The example of a company like Daimler-Benz being forced to repay around $17.5 million in the mid 1990s should encourage U.S. corporations in these sectors check things out before accepting an incentives package.

Taxation

Governments across Europe realize the importance of a corporate-friendly tax climate as a cornerstone to attract and retain foreign companies.

To the untrained eye, some countries might seem to lack that cornerstone. Take Belgium, Germany and Italy, for instance. Belgium has had the reputation of instituting one of the highest corporate income tax rates in Europe.

But what are the facts? With a corporate tax rate of 39 percent, Belgium ranks first in Western Europe. This leadership position is partly due to the fact that France and Germany implemented corporate tax reform, including a reduction of their corporate tax rates.

Yet the trained eye will look for the effective corporate tax rate. In Belgium this rate - averaging 24.1 percent in 1999 (depending on the computation methodology) - is much lower than the nominal rate, bringing the country back into the European flock.

Yet, very often, the interest of U.S. companies will be stalled by a high nominal tax rate, and executives end up discarding countries and regions that could really help them succeed in tackling Europe.

Political leaders are fully aware of this and the list of governments that are pushing through tax reforms continues to grow. As recently as April, the Belgian Prime Minister announced the reduction of the current corporate tax rate to 33 percent (or 33.99 percent to include the 3 percent solidarity surcharge).

But this merely seems to be a first step. The government already announced that the ultimate goal is the abolition of the solidarity surcharge and a further reduction of the nominal rate to 30 percent.

Some of our U.S. clients are initially puzzled by another 'great' invention of Europe's tax authorities: the so-called value added tax, or VAT. VAT is levied on products and services as delivered by private enterprise, and takes the form of a percent mark-up of the purchase price.

With no direct equivalent in the American tax system, U.S. companies sometimes tend to consider VAT as a cost, and then seek locations with low VAT-rates. This is not necessary. VAT is a cost only insofar as companies cannot compensate the VAT due on their purchases with VAT collected on their sales.

Most companies will have a positive balance of collected VAT that must be transferred to the government's tax collector's accounts. For this purpose, all companies receive a VAT registration.

Countries like Luxembourg, Liechtenstein, Gibraltar or the Isle of Man, have low VAT rates (if any). But EU legislation has kept such VAT-havens from becoming the Nirvana of direct sales and e-tailers, as it forces companies to apply the VAT rate of the country in which the ultimate consumer resides when they ship product abroad.

This rule does not apply to local sales, which explains the long lines of Belgian cars at Luxembourg's petrol stations. The two countries have a VAT differential of over 9 percent on unleaded gasoline.

Strategic start-up options

For businesses that are seriously considering expanding into Europe, here are a few points to consider on various types of operations.

Manufacturing. Many companies produce goods elsewhere and ship them to Europe, so why shouldn't you? For those companies that actually need to manufacture in Europe (for example because of trade barriers, transportation regulations, strengths of the U.S. dollar, or delivery lead times) there still is the option to joint venture or to outsource, in addition to setting up your own operations.

Teaming up with a European counterpart and eventually buying him out has been the predominant strategy over the last decades. But with increasingly fewer take-over candidates remaining, the number of U.S. executives that outsource or set up their own operations is clearly on the uptake.

This is particularly true for Western Europe, while Central and Eastern Europe still offer a relatively large number of joint-venturing options. The enthusiasm for brownfields tends to be limited as European countries, like the United States, increasingly hold the current site owner responsible for any accrued environmental liabilities, unless these are covered by an agreement transferring liability to the actual (previous) polluter.

R&D Facility. Companies that have already gathered critical mass and require local R&D, or those for whom R&D is the core business, usually establish European R&D facilities in greenfield sites or as joint ventures.

Companies that need local development to gain initial market entry typically end up in science parks, co-locating with similar companies and R&D. Co-locating gives companies access to qualified personnel, research programs and sometimes incentives/grants packages. There are over 300 science parks across Europe.

Headquarters. The most likely option is a greenfield location. Headquarters typically do not qualify for any of the previously mentioned investment types.

Service Centers. The service centers vary from the traditional back office operation to contact centers. For these investments, both greenfields and brownfields are likely modes of entry. Outsourcing of service centers is a relatively new phenomenon in Europe.

Sales Office. A partnership may be the first option depending on how mature the U.S. company is. The larger the company, the less the impact the investment will have on the overall company statements. Obviously, ownership may become an issue that should not be shared with a local partner.

This is different for a small company that actually needs its partner's network to pioneer on this new market.

Elias S. van Herwaarden is director of business location services, and Robert Jan Meulmeester is senior consultant of business location services, with Andersen. The two men have helped numerous companies select locations in both Europe and the United States. You can reach Elias at elias.van.herwaarden@be.andersen.com, and Meulmeester at robert.jan.meulmeester@us.andersen.com.

EUROPEAN INCENTIVES CASE STUDY

Applying incentives toward a site selection decision can be difficult. The following is an example of how a European and American company worked together to expand in Spain.

The manufacturer had selected a total of 17 countries, with a wide diversity in operating environments and cost structures, for its initial search area. Through a strategic workshop, our site selection consultants helped management to define the investment's strategic goals, as well as the location criteria for the project.

"Europeanizing" the project proved vital at this stage. Most of the company's specifications for the project, such as surface and transport requirements, had been based on management's experience in the U.S. domestic market.

Regulations on working hours throughout the countries under consideration forced the joint team to develop new assumptions on required headcount at shop floor level.

Subsequently, eight so-called threshold criteria - or knockout factors - were used to reduce the search area to a manageable list of six countries. As the project was highly capital-intensive, the availability of subsidies for fixed assets was one of these criteria. The availability of schemes for pan-European tax planning was another factor.

A detailed regional analysis in these six countries mapped out operating environments, site availability, cost levels, and set baselines for possible incentive offerings. The company went through a first round of pre-negotiations, which led to incentive packages that varied not only among countries, but also among regions within a country. The packages included such benefits as:

* Cash grants toward fixed asset investments (excluding the cost of land in some countries)

* Exemption from local business tax

* Accelerated depreciation

* Reduction or even exemption from social security contributions

* Tax credits for corporate income tax

* Advance tax rulings

* Subsidized buildings

* Subsidized site infrastructure

* Subsidized utilities

* Low interest loans

Our team found that the initial offerings ranged between 7.5 and 21 percent. A second round of negotiations raised the upper bid to 27 percent, yet for various operating reasons, the company wished to locate in the country with the lower incentive offering.

We followed up with a detailed site search and identified two options that allowed our client to shave around 15 percent off fixed asset investment as a result of sharing infrastructure.

A subsequent third round of negotiations led to the country raising its incentive offering from 7.5 to 10 percent. As a result, the total package equated to around $60 million, excluding the tax savings that could be realized by maximizing the opportunities offered by the country's pro-business tax law and international tax treaties.

Differences between the U.S. and Europe

* Data collection and interpretation straightforward in U.S., but very challenging in Europe

* Better equipped and more professional economic development organizations in America

* Less political and economic changes in the U.S.

* Less risk in the U.S.

* Fewer cultural differences in the U.S.

Who Adopted The euro?

Belgium Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden