Back in the 1980s it was all so simple. If you wanted a European presence you simply had to decide whether it was going to be in Ireland or the UK. An investment in these locations meant that everyone spoke the same language on both sides of the Atlantic, these countries were the most similar to the United States culturally, and they also had a long and stable track record of supporting U.S. investments.
Furthermore, one phone call to the UK or Irish Embassy and officials would sort out the investment for you.
Today, life is much more complicated. The entire European landscape has changed and equally importantly, the way of doing business has changed as well.
In the mid 1980s, Europe still had an Iron Curtain down the middle, some European economies were suspicious of foreign-owned investment, and if you made a corporate investment, real-time management information was reliant on fax machines.
Small wonder then, that until the 1990s, large companies were generally risk-averse with regard to location and selected the easiest launching point for their investments.
| Overall, the number of foreign direct investment projects into Europe increased 27 percent in the first half of 2004 compared with the same period in 2003, according to Ernst & Young’s European Investment Monitor (EIM). |
In 2005, with the universal use of e-mail, Web-based management information systems and a broader acceptance of English as the language of commerce, it is now easier to do business anywhere on the planet.
Europe has also expanded its boundaries to an extent that was once considered impossible and, in addition, the importance of inward investment as a benefit for the good in stimulating economic growth has been recognized by virtually every European state.
As a result, U.S. investors now have a bewildering array of potential locations from which to choose.
The key to the question lies in the reason why a company is seeking the investment in the first place. In Ernst & Young’s experience, companies undertake international investment projects because they want to:
Ø Spread their risk geographically.
Ø Re-engineer to change their cost structures.
Ø Enter into (or expand within) a new market.
Ø Access technology or other factors of production.
Clearly, each of these factors lead to a company developing a different set of selection criteria and, therefore, potentially selecting a different location.
There is no one location in Europe that can provide the perfect solution to every company’s problems — no matter what the glossy promotional literature claims.
Statistical Evidence
Since 1996, Ernst & Young has maintained a database of every foreign direct investment announcement made in the European press. The database, the European Investment Monitor (EIM), provides a high level of detail on U.S. investment trends during the period. (See the chart on this page for the top 10 country locations for U.S. manufacturing and non-manufacturing investment for 2004.)
Overall, the number of foreign direct investment projects into Europe increased 27 percent in the first half of 2004 (1,432), compared with the same period in 2003 (1,126), according to EIM.
Central and Eastern European countries performed exceptionally well during this period, with Hungary, the Czech Republic, Poland and Russia increasing their aggregate share of all projects from 14 percent in the first half 2003 to 20 percent in the first half of 2004.
Statistically, the UK remains the most popular location to make an investment and France is the second most popular destination for investment.
The list of locations, however, looks very different for manufacturing projects compared with service sector investment.
Increasingly, new manufacturing projects are being undertaken in the lower-cost Eastern European states and the stellar performers in 2004 were Poland and the Republic of Slovakia, both of which recorded large gains compared with 2003 results.
The momentum that began 10 years ago has now resulted in a seismic shift in European manufacturing.
Investment is marching east and U.S. investors selecting Poland, Slovakia, Latvia and even Ukraine are no longer pioneers — they are joining the procession.
While the number of projects provided by the automotive components, electronics, food, and the machinery and equipment sectors has remained relatively stable, the chemicals sector has seen the largest relative decline during the past seven years, although it still remains a sizable generator of investment.
Mitigating the impact of manufacturing investments migrating east is the service sector, where investments are continuing to be made in Western European countries (notably the UK and France).
The service (non-manufacturing) sector covers a diverse range of activities from research and development facilities to sales and service locations. Investments in these sectors are the strongest since EIM records began in 1997.
However, the top locations for service sector investments are centered on the key city areas of London; Paris; Stockholm, Sweden; Barcelona, Spain; Copenhagen, Denmark; Munich, Germany; Dublin, Ireland; and Amsterdam, the Netherlands.
Although Western countries are attempting to attract investment into more regional areas, it remains a challenge for these countries to offer the level of critical mass required to provide assurance to companies making large-scale service sector investment outside of capital city regions.
In fact, despite the increase in the general importance of the service sector, there has been relatively little variation in the key industry sectors generating investment across Europe during the past eight years.
Since EIM records began, software has consistently created high numbers of investment, and remains the most important sector in 2004.
During recent years, there has been a marked growth in the importance of the service sector, especially outsourcing and business services.
Selection Criteria
As internationalization continues, U.S. companies not only consider new potential locations, but they also increasingly examine different models of entry into a new market, such as joint ventures, acquisitions or partnerships.
Each will depend on the reason why your company is seeking the investment in the first place. Obviously, some models can be utilized as an interim step before a company makes the full commitment to a greenfield investment.
As ever, the decision requires a trade off between gaining maximum control weighed against increased risk, cost and time commitment.
For those companies that are considering direct investment, the factors below, although by no means exhaustive, provide an indication of the factors that should be considered at an early stage.
Cost of doing business. The driver for the expansion of the east continues to be cost. The expansion of the European Union has brought one currency and one rulebook to a selection of low-cost economies. It is possible to divide Europe into a three-tier cost structure: high-cost EU economies, low-cost EU economies and peripheral economies.
The high cost Western economies are the EU preaccession, plus a few other states such as Switzerland. The high cost is mitigated by the stability of an advanced economy, a highly skilled work force and potential market scale opportunities provided by the destination country.
Within these economies there remains a graduated cost scale, with Spain, Portugal and Greece still offering cost advantages.
The mid tier is made up of the accession states from the relatively well-established industrial economies of the Czech Republic, Poland and Hungary through to the emerging Baltic States. Investors gain the certainty (and legislative burden) of EU regulation and market opportunity without excessive cost.
The last tier of countries is potentially the next major areas for growth in inward investment and includes countries such as the Ukraine, Belarus and perhaps some North African economies.
Outside the EU, countries are able to offer a less-regulated environment at an extremely low cost, while being adjacent to the enormous EU market. Of course, the downside is that the lack of maturity of these economies leads to a lack of certainty and a higher risk investment.
Skills, skills, skills. The confidence that you will be able to access a highly skilled work force, which along with being one of the largest cost factors to consider, is essential to the success and sustainability of your investment.
Understand your skill requirements, but do not limit this to the initial and short-term need. Ensure your medium and long-term requirements are well-developed and investigate where the skills come from.
We see this most notably in the chosen locations for financial services investments, which have focused on the major Western European cities, where the work force is large and diverse.
A large pool of graduate and undergraduate students, as well as an inbound migration of labor attracted to these key cities, adds to the availability of skills and provides further confidence of the ability to accommodate short- and medium-term skill requirements.
Connectivity. Somewhat of a given you may think and again, this depends on the reasons for investment, but access to your new investment is critical.
The liberalization of the European skies has made air travel efficient and inexpensive. Investors must be assured that they, their customers and their work force are able to access the new facility quickly.
The greater the number of nodes of transport accessing your investment the better. Only the larger economies may offer the frequency and flexibility of transport options to the United States, which may be essential in a crisis.
Financial Incentives. Many regions also tempt investors with seemingly attractive financial incentives that will subsidize the initial investment but will never make a bad investment make sense.
Incentives can be valuable in offsetting initial costs but the terms need to be fully examined.
The financial outcome of any new investment needs to be modeled comprehensively and must include all costs and benefits, including national and local taxation and levies.
Only then can conclusions be drawn about the overall attractiveness of a location from a cost perspective.
Track record. Dig beyond the glossy promotional material to investigate the ability of a specific location to accommodate your investment.
First, check past experience. If a location has been successful in attracting similar investments, and second, whether the location has retained those investments in the medium to long term.
Although each investment is different, this investigation will provide some comfort that the necessary infrastructure is in place to ensure an investment can be secured, incubated correctly and developed into a successful, sustainable and profitable venture.
Go that extra mile. International investment remains a priority for locations globally.
This focus has enabled companies to tap into a wealth of resources and has fueled the competitiveness of each location. This is good news for any investor.
The support an investor will receive, however, will differ dramatically depending on location, industry sector and the type, scale and reason for the investment.
Any international investor must, in undertaking such a detailed and important decision, be assured that they are receiving dedicated, experienced and professional advice and support service.
It is difficult to define the best European locations without investigating in great depth the reasons, type, scale and parameters of the investment.
Recent trends of past investments by country or specific industry sectors provide an excellent base line for comparison, but as explained earlier each investment comes with different challenges and considerations.
Any investment decision is made following a complex investigation and decision-making process. Executed correctly, a greenfield investment can significantly benefit your company.
However, the location criteria, service received and fundamental reasons for investing must be right. Failure will be felt across the company in the long term.
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