Firms relocating to the Netherlands due to Brexit:
stock market reactions and firm motivations
Dorian Cornelissen 10808434 dorian.cornelissen@student.uva.nl
Economics and Business, Finance and Organisation University of Amsterdam
Supervisor: Mario Bersem 19-06-2020
This thesis reviews the stock market reaction to UK-based firm’s decision to relocate to the Netherlands due to the Brexit. I find a significant positive effect which is mainly driven by financial and pharmaceutical companies. Simultaneously, I review relocating companies’ motivations for opting for the Netherlands. I find the Netherlands to be an appealing country to relocate to, especially for financial and pharmaceutical firms, substantiating my event study analysis.
Firms relocating to the Netherlands due to Brexit: stock market reactions and firm motivations
On the 31st of January, at midnight, the United Kingdom left the European Union. A
transition period, where all EU rights and regulations continue to apply to the UK, is now in place until December 31 2020. Following this period, Kierzenkowski, Pain, Rusticelli and Zwart (2016) suggests a significant economic effect for the EU but even more so for the UK. The magnitude of this effect is largely dependent on the currently negotiated future economic integration between the EU and the UK and varies widely among different models. In a worst case scenario, it could entail a net economic loss of 10% for the UK (Busch & Matthes, 2016).
The impending Brexit and subsequently the possible loss of European market access, has spurred UK-based companies to explore relocations to European countries. A survey
conducted by the Institute of Directors (n=1202) found almost one third of British firms are considering moving operations abroad . The Netherlands Foreign Investment Agency (NFIA) states that 140 of those businesses have moved operations or opened an office in the
Netherlands, a move often hailed in the Dutch press (“Brexit doet recordaantal bedrijven naar Nederland verhuizen,” 2020). Furthermore, the NFIA is talking to 425 UK-based companies about a relocation or expansion to the Netherlands. Currently, there are no studies on this subject and I hope to provide a first stepping stone for more thorough research in the coming years.
This thesis will review the market’s reaction to firms opting to move or expand to the Netherlands using an event study methodology, as explained in MacKinlay (1997). By doing this, I aim to answer the following research question: What was the stock market’s reaction when UK-based firms announced they would be moving operations to the Netherlands as a result of the Brexit? Simultaneously, I try to provide qualitative reasons why UK-based firms are leaving the United Kingdom and why they would relocate to the Netherlands. This could be crucial knowledge for firms considering the move and could potentially aid them in their decision.
I examine the stock market’s reaction when 14 publicly traded firms announce to move operations from the UK to the Netherlands. I find a significant positive effect at the 0.10 level for an event window from day -3 to + 3 and a significant positive effect at the 0.05 level for
an event window from day -5 to +5. This can largely be attributed to firms active in the financial and pharmaceutical sector.
Additionally, I critically examine the press statements of 56 companies for motivations pertaining relocating to the Netherlands. I find the stated motivations to settle in the Netherlands generally align with the statistics and studies used to test them . Overall, the Netherlands is an inviting environment for firms leaving the UK and its employees. Especially for financial and pharmaceutical companies, there are ample reasons.
This thesis proceeds as follows. In section 1, I start by examining the existing literature on the forecasted effects of the Brexit on the UK economy and its firms. I take a closer look at research on headquarter relocations and stock-price effects. I use this framework to develop a hypothesis and a greater understanding of why firms are leaving the UK. In section 2, I describe the dataset used to test my hypothesis. The methodology and results are presented and discussed in section 3 and 4 respectively. I explore why firms relocate to the Netherlands specifically in section 5. Lastly, a conclusion can be found in section 6.
1. Literature review and development of
hypothesis
Alli, Ramirez and Yung (1991) show that corporate headquarter relocations are associated with significant positive stock price effects. This is expanded on by Ghosh, Rodriguez and Sirmans (1994) who find a significant positive stock market reaction to corporate headquarter relocations which are attributed to cost savings. Headquarter relocations not attributed to cost savings show a significant adverse reaction.
Although the exact costs of Brexit for UK-bases companies is unclear, it is plausible that these are substantial. Therefore, companies moving to the Netherlands and away from the UK, where they might potentially face barriers and lower foreign direct investment, can be seen as a cost saving move. I hypothesise there to be a significant positive reaction in the stock markets after firms announce to relocate. However, it must be noted that not all companies that are relocating to the Netherlands are strictly headquarter relocations. This could have a negative impact on the robustness of the found results.
Most researchers agree that in almost any scenario the UK will be worse off than the EU in the long run. Exports to the EU account for 12 percent of the UK GDP, whereas imports from the EU account for 3 percent of EU GDP (Sampson, 2017). Furthermore, the EU as a trading block has greater bargaining power than the UK. Although the UK is a bigger trade partner for the Netherlands than for most other European countries, impact in the Netherlands will still be less severe than in the UK (Erken et al., 2017). In this section, I primarily focus on the economic effects of the Brexit on the UK economy as opposed to that of the EU and the Netherlands. This is important as it helps us understand why firms are leaving the United Kingdom. Furthermore, in section 5 I explore motivations for relocating to the Netherlands specifically.
There is no empirical evidence on the economic effects of the United Kingdom leaving the European Union as it hasn’t happened yet. There is also no comparable precedent of a country leaving a major trading block such as the EU. This makes it hard for researchers to estimate precisely the impact of the Brexit. At this time, there is a transaction period in place where all EU regulations and rights still apply to the UK and they are still a part of the European single market. This will end on the 31’st of December this year. A currently negotiated agreement will then take place. The form of this agreement is still unknown. Additionally, it is also possible the UK and EU negotiators fail to reach an accord. The presently available research is therefore in most cases a prediction dependant on the post-Brexit relations between the UK and the EU.
Sampson (2017) distinguishes between three different possible outcomes. In the first outcome the United Kingdom could remain part of the European Union’s single market by joining the European Free Trade Association (EFTA). This is currently compromised of Norway, Iceland and Liechtenstein. The second option is where the UK and EU could sign a free trade agreement to govern their trade and economic relations. Third, if no agreement is reached, the UK and EU will continue trading under the WTO rules. Felbermayr (2017) and the Rabobank (Erken et al, 2017) use the same distinction. In public, the third option is usually referred to as a ‘Hard Brexit’ whereas option one is a ‘Soft Brexit’. A hard Brexit would most likely have a more negative impact on the post-Brexit UK economy and a soft Brexit would have more mellow consequences.
The Rabobank estimates the cost of a hard Brexit to be 18% of UK GDP growth until 2030. In comparison, the cost of a soft Brexit, or ‘medium’ Brexit, is estimated to be 10% and 12.5% respectively. Other researchers are less pessimistic with Ottaviano et al. (2014a
and 2014b) estimating a negative impact of 1.1% up to 3.1%. The Centre for Economic Performance predicts a 9.5% and 6.3% loss (Dhingra et al., 2016). Sampson (2017) reviews other studies and finds estimates ranging between 1% and 10% of UK income.
The predicted large impact on UK GDP growth results from the following economic aspects. First, the Brexit leads to a growth in uncertainty. Second, the large UK service industry might face new barriers. Third, if the UK leaves the European single market they might now face trade barriers with their biggest trade partner. Fourth, a decrease in immigration could slow production and lastly, the Brexit could lower foreign direct investment for the UK.
1.1 Uncertainty
The unexpected outcome of the Brexit referendum in June 2016 resulted in high uncertainty for UK consumers and businesses. This can be seen in the Economic Policy Uncertainty index as constructed by Baker et al. (2016). The index is based on newspaper coverage frequency and shows uncertainty spiking after the referendum. Even now, more than half of British firms report Brexit in their top three sources of uncertainty (Bloom et al., 2019). A high uncertainty results, for example, in less investing and hiring by firms (Bernanke, 1983) and a higher cost of financing (Pietro, 2013). Furthermore, Born et al. (2017) show that the outcome of the Brexit referendum lowered spending and resulted in a GDP loss of 0.5% contributed to uncertainty. Lastly, following the referendum outcome, the British pound depreciated by 10%, increasing the cost of living for British households.
Breinlich et al. (2017) contribute this depreciation to a growth in uncertainty. It must be noted that these effects can (partially) be reversed when uncertainty decreases, for example once a trade agreement has been established. Indeed, Handley and Limão (2015) find an increase in trade once a trade agreement has been established which can be largely contributed to lower uncertainty.
1.2 Non-tariff and tariff barriers
In 2014 the UK exported services worth 273 billion euros of which 38.3% to the EU. A large part of that is accounted for by financial and other business services with the UK being the largest exporter of these services inside the European single market. Accordingly,
financial services account for 7 to 12 per cent of UK GDP. The European passporting system enables authorised banks or financial services companies in any EU or EEA country to operate freely in other countries with minimal additional authorisation. It also enables banks
and financial services companies to sell products and services to other EU countries. There are nine different passports obtainable for firms in the EU, each covering a different sort of financial service. These are not available to firms incorporated outside the EU and non-European financial firms therefore face significant regulatory barriers compared to non-European firms (Armour, 2017). Lastly, EU registered investors can trade certain shares only on exchanges based in the EU. This forces London based stock exchanges to resettle elsewhere to be able to continue serving their customers.
In a hard Brexit scenario, where the regulations in the financial sector are not harmonised, UK's financial services revenue could fall by between 12 and 18 per cent (Djankov, 2017). This effect is already visible in this thesis with many financial firms relocating to the Netherlands. A soft Brexit, where the UK could retain its passporting rights, would lead to less severe consequences. Since a majority of the UK’s bank and financial services firms are located in London, it is no surprise the city overwhelmingly voted to remain in the EU (Goodwin & Heath, 2016). Non-tariff barriers also exist in other sectors and include for example product standards and safety.
The EU has stated that the UK cannot remain a part of the single market if they do not abide by the four European freedoms, one of which is the problematic free movement of persons. Since this is one of the primary reasons the UK voted to leave, it is highly unlikely the post-Brexit UK will be able to trade as a member of the single market.
This results in not only non-tariff barriers but in trade barriers as well. These increased trade costs result in higher import prices, less comparative advantages and a lower production efficiency and output for UK firms (Dhingra et al., 2017). Sampson (2017) notes that trade costs are also welfare affecting by reducing product variety, raising mark-ups and allowing less efficient firms to survive. In the most pessimistic scenario trade would be conducted under WTO terms whereby the ‘most favoured nation’ rule would come into effect. This means the UK has to impose the same tariffs on every member of the WTO, including the EU, unless a trade agreement has been established. On the European side, these tariffs average about 4.5% (World Bank, 2017). This is already low hence the estimated 1.28 to 2.61% UK income loss due to barriers, is largely driven by non-tariff barriers (Dhingra et al., 2016).
Finally, trade costs between EU countries have been declining approximately 40% faster than those between other countries (Méjean and Schwellnus, 2009). If the UK leaves the single market, they will not benefit from any future reductions.
It should be noted that Japanese companies are especially vulnerable to the effects of Brexit due to a proposed corporate tax-cut by the UK government. Although this tax cut is designed to retain UK-based companies, it could result in the Japanese government labelling the UK a tax haven and introducing back taxes for UK based Japanese firms. In November 2019, the UK government decided to cancel the planned corporate tax reduction but this might be too late for some Japanese firms. Indeed, MUFG and Shionogi decided to relocate to the Netherlands well before this date.
1.3 Immigration
The pending Brexit would most likely lead to a lower net immigration to the UK. With ‘regaining control over immigration and its own borders’ being a primary motivation to vote leave for 33% of the leave voters (Lord Ashcroft, 2016), it is unlikely the UK would allow for free movement of persons in a new Brexit deal. Many UK citizens seem to be under the impression that the influx of immigrants the past years is hurting the UK. However,
disregarding social and cultural aspects, immigration is actually beneficial. Wadsworth et al. (2016) show that most UK immigrants are on average more educated and more likely to be in work than natives. Access to these high skilled immigrants is of particular importance to the financial sector and could partially explain the large share of financial firms relocating to the Netherlands found in this thesis. Portes and Forte (2017) estimate a significant UK GDP loss of 0.9 to 3.4 per cent by 2030 attributed to a decrease in immigration.
1.4 Foreign direct investment
Foreign firms operating in the UK tend to be more productive and pay higher wages (Girma et al., 2001). On average, FDI raises income and productivity. This is especially true for countries with well-developed financial markets, such as the UK (Alfaro et al., 2004). Furthermore, UK firms benefit from FDI by so-called knowledge ‘spillovers’ where
technological information from foreign firms spills over to domestic firms (Branstetter, 2006). Bruno et al. (2015) estimate a FDI loss of around 22% when the UK leaves the European single market. Dhingra et al. (2016) develop a model which shows there is always a
significant positive effect of being in the EU on FDI, with an average of 28%. They identify three channels through which the Brexit might impact UK FDI. First, the UK being part of the single market makes it an attractive target for foreign firms due to the lack of barriers within
the EU. This makes it easy for UK based firms to export to European countries. Indeed, these barriers not only affect UK firms directly as described above, but also indirectly through lower FDI. Secondly, trade barriers also affect imports to the UK which could prove troublesome, especially for larger multinationals with complex supply chains. It is obvious this could deter firms from investing in the UK. Thirdly, uncertainty regarding these barriers but also regarding the UK economically and politically, would discourage foreign firms to invest in the UK. Since the Brexit referendum in June 2016, UK net FDI has dropped from over ₤92 billion to ₤15 billion in the last quarter of 2019 (Trading Economics, 2019). The firms studied in this thesis obviously contribute to this drop.
1.5 Within firm effects
In addition to the above effects, UK firms report a reduced productivity by 2 to 5% since the 2016 referendum (Bloom et al., 2019). This is not due to effects in the economy as a whole, but from within-firm effects. For example, firms are now committing several hours per week of management time to Brexit planning which hampers production. These effects are larger in more productive multinationals and smaller in less productive domestic firms. This could partially explain the abundance of large international firms studied in this thesis.
2. Data
It proves difficult to find companies who are publicly announcing their move to the Netherlands. They might be unwilling to publicize this information out of fear of damaging their existing relationship with stakeholders in the UK. The Netherlands Foreign Investment Agency (NFIA) is the regulatory body that oversees and guides firms relocating to the Netherlands. They state (where?) 140 companies have moved from to the UK to the
Netherlands but upon my request were unwilling to provide a complete list ‘because this is not in line with the relationship they strive to maintain with companies’ and ‘it is up to companies to communicate this’. Additionally, requests from me to journalists reporting on the Brexit were left unanswered. Nevertheless, Clingendael Insititute has identified 56 companies who have moved to the Netherlands due to Brexit (Korteweg, 2019). Since this is currently the most comprehensive list available, I will use this list as the foundation of my thesis.
I distinguish between firms relocating and firm’s expanding operations. Relocating firms are firms with no prior activity in the Netherlands while expanding firms do have existing operations on which they further expand. I examine the motivations of all 56 firm’s regarding relocating to the Netherlands in section 5.
Regarding the statistical analysis, 21 of the firms on Clingendael’s list are publicly traded. TradeWeb’s IPO was on 03-04-2019 which is after the relevant event date and can therefore not be used in this study. Clingendael distinguishes between CME BrokerTec and CME EBS. While these are different firms, they are both part of CME Group and share a stock. For the sake of this analysis, I will be treating them as one company. Furthermore, while Clingendeal names Chesnara as a relocating firm, I am unable to find any press statement confirming this. Chesnara has indeed expanded in the Netherlands but this has been a part of their regular operations for years and the company denies to undertake any specific actions regarding Brexit. Mizuho Financial Group has moved jobs from their UK headquarters to a Dutch subsidiary but decided to move their headquarters to Frankfurt. ING Bank has in fact moved jobs to London and away from Amsterdam following the Brexit referendum. Subsequently, TP ICAP is indeed moving jobs to Amsterdam but at the same time announced to be moving their headquarters to France. Lastly, Blackrock has moved jobs from London to Amsterdam but in the same press release declared to keep their UK office as their European headquarters. To capture only the relevant stock movements I exclude these companies from this analysis.
This leaves 14 publicly listed companies on various exchanges: 4 on the NASDAQ, 2 on the NYSE, 1 on XETRA, 1 on ASX, 2 on LON, 3 on TYO, and 1 on MADRID. As market proxies I use the S&P 500 for the NASDAQ and the NYSE, DAX for the Xetra, S&P/ASX 200 for the ASX, FTSE 100 for the LON, NIKKEI 225 for TYO and IBEX 35 for MADRID. Of these companies, 5 are financial firms, 3 are in electronics, 3 are pharmaceutical
companies, 1 is an automobile company, 1 is a transport business and 1 is active in the media sector. Furthermore, 3 firms are expanding while 11 are relocating.
Brown and Warner (1980) show that the null hypothesis is rejected two to three times less often in an event study where the announcement date is not precisely known as opposed to a study where the event date is known. To find a reliable announcement date, I used the press releases section on each company’s website or found the company press release on
investigate.co.uk. In 11 cases however, the company’s website didn’t hold official press releases or the relevant press release could no longer be found. It is clear company’s don’t publicize easily about leaving the UK due to the Brexit. For those firms, I had to resort to
online news articles to find an appropriate announcement date. I used articles by the Financial Times to get the most accurate data. However, in comparison with official company press releases, I deem online news articles to be a less reliable source for an event date and a
possible source of inaccuracy in the data. Furthermore, in 5 cases, namely Dechra, Discovery, MUFG, Philips and RBS, information about a relocation had already been speculated about before an official announcement was made. This could lead to a less significant impact on stock prices following the announcement as investors had already anticipated the
announcement.
I use historical daily returns for both the stock data and the market proxy, retrieved from yahoo.finance.com. To estimate the market model and proxy normal returns, I examine daily returns from 120 days before up to 10 days before the event. Thus, a maximum of 79 trading days to create the estimation window 𝐿 . Subsequently, I use different event windows,
ranging from 5 days before the event to 5 days after the event to create the event window 𝐿 . I check for the impact of firm size on significant returns by regressing against the natural log of total assets. This leads to a more normal distribution of firm sizes which consequently leads to more robust regression results. I use firm’s balance sheets year ending 2019 and currency exchange rates of 31-12-2019 to convert total assets denominated in other currencies to dollars.
3. Methodology for statistical analysis
When the sample firms are from unrelated industries, it appears that the simple, one factor market model works at least as well as the alternatives (Binder, 1998). Furthermore, Binder states that cross-sectional dependence of abnormal returns is not a problem when the event dates are randomly dispersed throughout time, as is the case in this thesis. Time series
dependence is also irrelevant as the event window is small relative to the estimation window. I assume the individual abnormal returns to be independent and identically distributed.
Let the announcement date be the event date, 𝑇 . I use days 𝑇 − 120 up until 𝑇 − 10 and for each stock (𝑖) a market proxy (𝑚) to be able to calculate α, β and σ for normal returns using the following formulas:
𝑅 = 𝛼 + 𝛽 𝑅 + 𝜀 𝐸(𝜖 = 0) 𝑣𝑎𝑟(𝜀 ) = 𝜎 𝛽 = ∑ (𝑅 − 𝜇 )( 𝑅 − 𝜇 ) ∑ (𝑅 − 𝜇 ) 𝛼 = 𝜇 − 𝛽 𝜇 𝜎 = 1 𝐿 − 2 (𝑅 − 𝛼 − 𝛽 𝑅 )
Where 𝐿 is the number of trading days in the estimation window from 𝑇 − 120 till 𝑇 − 10. Having calculated these parameters for the estimation window, I am now able to calculate abnormal returns, 𝐴𝑅 , for the event windows, 𝐿 . I use three different event windows, namely 𝑇 −1 up to 𝑇 + 1, 𝑇 − 3 up to 𝑇 + 3 and 𝑇 − 5 up to 𝑇 + 5.
𝐴𝑅 = 𝑅 − 𝛼 − 𝛽 𝑅
Although daily stock returns usually don’t follow a normal distribution, Berry et al. (1990) show abnormal returns do roughly follow a normal distribution and the Student t-test is best suited for event studies and to test my hypothesis. Since 𝐿 is large, the sampling error of the parameters get smaller and I am able to use the population variance to draw inferences for the event (MacKinlay, 1997). I add the abnormal returns for each company to get the Cumulative Abnormal Returns (CAR). I use a t-test to test for significance for each company individually.
𝑆 = 𝜎
𝐴𝑅 ~𝑁(0, 𝜎 (𝐴𝑅 )) 𝐻 : 𝐶𝐴𝑅 = 0, 𝑡 = 𝐶𝐴𝑅
𝑆
To test cross-sectional for the event, I use a robust regression on the Cumulative Average Abnormal Returns (CAAR).
𝐶𝐴𝐴𝑅 = 1
𝑣𝑎𝑟(𝐶𝐴𝐴𝑅) = 1
𝑁 𝜎
𝐶𝐴𝐴𝑅~𝑁(0, 𝑣𝑎𝑟(𝐶𝐴𝐴𝑅)) 𝐻0: 𝐶𝐴𝐴𝑅 = 0, 𝑡 = 𝐶𝐴𝐴𝑅
𝑣𝑎𝑟
4. Results and Analysis
The performed t-test yields that average daily abnormal returns are insignificant for most firms over all event windows. In the 1-, +1 event window, three firms show a significant negative effect and one firm a positive effect. In the subsequent event windows, no negative impact is observed while five firms show a significant positive impact. Out of all firms, Alynalm and Marketaxess show the most positive stock market reactions. Philips show its most significant positive return at days -1 to +1 and no significant effect for other event windows. RBS shows a positive effect at the 0.10 level for event window -5 to +5.
When looking at the t-statistic for all firms, I find a significant positive effect at the 0.10 level for event window -3 to +3 and a significant positive effect at the 0.05 level for event window -5 to +5.
The calculated Cumulative Abnormal Returns and t-statistics for different event windows per firm and their size are reported in table 1. The estimation window is kept constant at -120 to -10.
I check for CAR dependence on firm size and find a small negative relation but it is not significant (p= 0.4971, t= -0.70). I use the cumulative abnormal returns from event window -5 to +5 to test this.
Table 1
Cumulative Abnormal Returns and T statistic per company for different event windows Event window
-1, +1 -3, +3 -5, +5
Size CAR t CAR t CAR t
Alnylam 21.599 0.040 1.291 0.137 2.00** 0.177 1.805** BMW 26.327 0.014 0.699 0.022 1.103 0.021 0.669 CBA 27.254 0.007 0.964 0.021 1.478* 0.028 1.116 CME 25.045 -0.018 -4.412** -0.016 -1.142 -0.027 -1.445 DECHRA 21.050 -0.037 -11.479*** -0.016 -0.476 -0.005 -0.106 Discovery 24.242 -0.008 -0.234 0.011 0.369 0.015 0.388 Ferrovial 24.022 -0.014 -2.275** -0.010 -0.991 -0.031 -1.285 MUFG 28.763 -0.004 -0.2133 0.009 0.432 0.028 0.899 MarketAxess 20.677 0.011 ¹ 0.524 2.388** 0.083 3.061*** Panasonic 24.772 -0.015 -1.341 -0.006 -0.360 -0.006 -0.227 Philips 24.136 0.008 2.388** 0.013 1.157 0.023 1.228 RBS 27.585 -0.009 -1.487 0.053 1.257 0.096 1.677* Shionogi 22.687 -0.004 -0.065 0.011 0.218 -0.009 -0.135 Sony 26.081 -0.030 -1.135 -0.021 -0.589 -0.003 -0.052 Total -0.004 -0.805 0.019 1.70* 0.028 1.850**
Note: *, **, ** denotes statistical significance at the 0.10, 0.05 and 0.01 level respectively. ¹ Only one observation in the event window.
When regressing Cumulative Average Abnormal Returns across all events, I find a significant positive effect at the 0.10 level for event window -3 to +3 and a significant positive effect at the 0.05 level for event window -5 to +5. This corresponds with the results reported in table 1 which are obtained with a t-test. This effect can largely be attributed to firms in the financial sector. Pharmaceutical firms show a positive effect but it is not significant. For firms in other sectors the effect is found to be the smallest. The difference between expansions and relocations is small with expansions being significant and relocations insignificant. Cumulative Average Abnormal Returns and t statistics for different event windows are reported in table 2. The estimation window is kept constant.
Table 2
Cumulative Average Abnormal Returns and T statistic per category Event window
-1, +1 -3, +3 -5, +5
Sample size
CAAR t CAAR t CAAR t
Total 14 -0.004 -0.80 0.019 1.70* 0.028 1.85** By sector Pharmaceutical 3 -0.000 -0.02 0.044 0.93 0.05 0.89 Financial 5 -0.003 -0.48 0.239 1.81* 0.041 1.88* Other 6 -0.008 -1.13 0.002 0.24 0.003 0.37 By sort Expansion 3 -0.002 -0.09 0.058 1.31 0.089 1.70* Relocation 11 -0.005 -1.15 0.008 1.26 0.011 1.16 Note: *, **, ** denotes statistical significance at the 0.10, 0.05 and 0.01 level respectively.
5. Motivations for relocating to the Netherlands
In general, I find the stated motivations by firms for relocating to the Netherlands to be consistent and the Netherlands to be a good place to settle for firms. Specifically, for the financial and pharmaceutical sector the country hosts appealing benefits. To be able to conclude this I examine the official press releases and news articles of the 56 firms named in the Clingendael report wherein firms state they are resettling or expanding. In 23 out of 56, no reason for relocating was provided. In 33 cases, the company did provide a reason for leaving the UK but not why they choose for the Netherlands. Additionally, 17 companies specified one or more reasons for relocating to the Netherlands in a press release. I form a clearer image using news articles, interviews and the Dutch EMA bid (The Dutch Bid for the EMA, 20017).
The Dutch 30% tax ruling for expats is a regulation that benefits relocating firms in all sectors. This regulation enables 30% of the salary of highly educated expats to be exempt from income tax for 5 years. Other countries have similar tax advantages for expats in place with France and Italy maintaining the most rewarding ones. Considering all European countries, the Netherlands ranks in the middle (Nederlandse Orde van Belastingadviseurs, 2018). Although this might seem more of an employee advantage than a firm advantage, it is
obvious that firms that are able to offer their employees a higher wage without driving expenses, have a competitive advantage.
Comparing effective corporate tax rates across Europe ranks the Netherlands, with 23 per cent, somewhere in the middle. Nordic countries as Sweden, Denmark, Iceland and Finland tend to tax lower whereas countries as Spain, Germany and France maintain a higher tax rate (OECD, 2017)
The most notable move to the Netherlands is the resettlement of the European Medicine Agency (EMA). Due to the Brexit, the London-based EMA was forced to relocate to another European member state. On 20 November 2017, the European Council and the EMA voted for Amsterdam. This decision followed an assessment of the formal offers, based on set criteria by the EMA, submitted by 19 member states to host the organisation. Examining the Dutch bid and the EMA assessment, helps us understand why the Netherlands, in general, is attractive to relocate to. The EMA also set criteria for their new premises but due to the very specific requirements this is hardly generalizable to other firms and I will not explore these further.
5.1 Transport
Among European airports, Amsterdam Schiphol Airport ranks fourth by world connectivity. Concerning European connectivity, Schiphol ranks first. The number of connections, average flight time and average wait time are taken into account (Malighetti, Paleari & Redondi, 2008). Subsequently, according to the Dutch bid, Schiphol is Europe’s preferred airport for travellers. With 12 connections per hour to Amsterdam Zuid and a one way trip taking 7 minutes, the city’s business centre and Schiphol are well connected.
However, looking at the city’s total connectivity, access to public transport is lower compared to other European cities. This is most likely due to the high share of trips by bicycle (Poelman & Dijkstra, 2015). Nevertheless, expanding to the whole country, the Netherlands ranks fourth in the world’s best infrastructure ranking by the World Economic Forum (2015) and first of the European countries. This can partially be attributed to the quality of the roads and the railroad infrastructure.
5.2 Quality of life
Although employees do not decide on the new location of the EMA or firms in general, it is important to prevent highly knowledgeable employees from leaving due to their new
environment not meeting their standards. Therefore, EMA employees were asked to evaluate the bids in a survey. Unfortunately, the different bids are anonymized and thus employees preference remains unknown. However, the survey does show the importance in matching employee needs and the quality of their new environment. If the EMA would have opted for one of nine lower ranked bids, business continuity could not have been ensured due to a low retention rate (EMA, 2017).
Overall, according to the Flash Eurobarometer 2015, the residents of Amsterdam show a 96% satisfactory rate concerning quality of life, among the highest of Europe. As in most European capitals, housing in Amsterdam is considered to be too expensive by local residents. This might be less of an issue for well-paid expatriates. Furthermore, quality of life in the Netherlands is ranked fifth in the world, fourth in Europe according to the Quality of Life Index of Numbeo (Numbeo, 2020). This index is an estimation which takes into account PPP, pollution index, house price to income ratio, cost of living index, safety index, health care index, traffic commute time index and climate index. According to Unicef, Dutch Children are the happiest in the world (Adamson, 2013).
The EMA also assesses countries educational facilities, taking special interest in international schools and education in English. The Netherlands ranks first in worldwide English proficiency (EF EPI, 2019) but does not perform well in student’s abilities. Overall, in reading and mathematics, students perform just above the OECD average but are trailing other Western European countries. The negative trend is worrying (Schleicher, 2019). Nonetheless, 9 Dutch universities are ranked in the top 200 worldwide (Topuniversities, 2020).
Dutch Social Security is ranked 33 in the world (Dixon, 2000). This might be relevant to spouses of expatriates and possibly their children and was thus taken into account by the EMA assessors. It should be noted that the study is outdated by 20 years and might no longer be relevant.
Most of these aspects do benefit firms in other sectors too. To get into more specific firm advantages, I distinguish between four categories: financial firms, pharmaceutical companies, NGO’s and other companies. Although motivations might overlap between categories, each category has their own specific motivations for relocating to the Netherlands.
5.3 Financial firms
The majority of the firms resettling, 32, are operating in the financial sector. All of them are opening new offices or expanding existing operations in Amsterdam. Indeed, location theory since Hotelling, for example Pandit, Cook & Swann (2010), suggests clustering benefits exist and are widespread. Especially firms where close proximity is an advantage, such as banks, tend to grow faster when they are near competitors. However, clustering can be achieved in other cities, for example Frankfurt, as well so this could hardly be the complete reason..
For banks, retaining European passporting rights is a primary motivator to resettle. A specific motivation for choosing the Netherlands is not provided and needs further research. The small number of banks, 4, relocating might be a result of the strict Dutch regulations that prohibit bankers from receiving a bonus of more than 20% their annual salary (Rijksoverheid, 2020). In European law this is limited to 100% . This Dutch law does not apply to traders and thus does not hamper their decision to resettle in the Netherlands.
According to Clingendael, there are 12 traders relocating to the Netherlands. This large number can be partially explained by the presence of the Amsterdam Internet Exchange (AMS-IX) which is the second largest internet exchange worldwide. Especially for high frequency algorithmic traders, the minimization of network latency to execute orders is of high importance (Chlistalla et al., 2011).
Another aspect to consider is the historically strong cluster of trading firms in Amsterdam. With the European Option Exchange, now Euronext, opening in 1978, Amsterdam had the first option exchange of Europe. This attracted early adopters like Optiver, Flow Traders and IMC, still some of the biggest high frequency traders worldwide. In an interview with the Dutch Autoriteit Financiële Markten the European Director of the relocated Quantlab, states being near competitors helps them learn and be more productive (AFM, 2019).
The CEO’s of Azimo and Vitesse PSP motived their move by praising the Dutch regulator. Indeed, the same is done by the CEO of MarketAxess, praising the ‘sophisticated attitude of the Dutch regulator towards trading venues’ (Stafford, 2017). The Dutch AFM recognizes the similarity with the British FCA in their 2019 annual report, stating that the FCA is “an
important and reliable European partner that generally endorses a similar supervisory philosophy” (AFM Annual Report, 2019). Furthermore, in June 2019 the AFM has consolidated its expertise by signing an agreement for closer cooperation with the FCA. A
report by PWC comparing strictness of the Dutch regulator to other European countries is inconclusive but states similarity between the British and Dutch supervisor (PWC, 2017). Either way, the strictness of regulators is irrelevant to firms moving out of the UK due to Brexit. The European Securities and Markets Authority, wherein all European supervisors are represented, have agreed to discuss all Brexit-related license applications.
5.4 Pharmaceutical companies
The Clingendael report identifies 5 organisations active in the pharmaceutical sector that have moved to the Netherlands. One firm, Dechra Pharmaceuticals, was already active in the Netherlands and shifted more assets to its Dutch subsidiary.
Obviously, being in close proximity to the EMA is a plausible motivation to relocate. All 5 decided to move after the EMA did. European pharmaceuticals need the EMA’s approval before being allowed to market a new medicine. This process is easier when the EMA is in close proximity.
Barry Greene, CEO of Alnylam, also names the countries ‘vibrant biotech ecosystem’ and ‘its attractive environment which makes it possible for companies with ground-breaking innovation to flourish’ as motivations. This statement is confirmed by looking at statistics from the European Patent Office. Per capita, the Netherlands submits the second highest number of patents in Europe (EPO, 2019). Furthermore, patent applications rise by an average of 4% every year (EPO Netherlands, 2019). Subsequently, statistics from the OECD show the Netherlands ranks eight worldwide for number of submitted biotechnology related patents, third in Europe (OECD, 2016).
The Life Science and Health sector is appointed Top Sector by the Dutch government which means a Top Team is assigned to further advance the field. This Top Team consists of representatives from Dutch life science industry, university medical centres and the
government and aims to stimulate multidisciplinary public-private partnerships.
5.5 NGO’s
The pending Brexit has spurred 4 British NGO’s to relocate to the Netherlands. In a press statement, the director of Euclid stated the primary reason to leave the UK is the loss of
European funding. In 2017, British NGO’s received €214 million from the EU (Agreements, 2017). However, the UK Government also paid ₤1.5 billion to the EU’s development and humanitarian aid budgets (Evennett, 2018). It is currently unclear whether these funds will be used to support British NGO’s or if the UK government will continue to support the EU’s budgets. This uncertainty motivates NGO’s to relocate.
On choosing for the Netherlands, the director of Euclid stated the following: ‘The
Netherlands won out on the six factors we were considering. It had a strong local member in Social Enterprise NL, great transport links by rail and air, a good community of expats working for international NGOs, attainable staff costs and a solid international reputation,’. He also added: ‘The Netherlands edged ahead of Austria largely because of the ease of doing business in English, the closer rail links to Brussels and London, and the wider air
connections around Europe’ (Preston, 2018). It seems the requirements as established by the EMA are generalizable to NGO’s too.
5.6 Other companies
The US Food and Drug Administration (FDA) has moved from London to Amsterdam following the move of the EMA. Its liaison is embedded in the EMA’s office. The FDA accredits food, drugs and medicine for the US market and thus works in close cooperation with the EMA (FDA, 2020).
The British Standards Institution (BSI) will move part of its operations that accredits medical devices for safe use in the European market. These will be merged with a pre-existing office in The Netherlands which motivates its move.
Three media companies have moved operations to the Netherlands, namely TVT Media, BBC and Discovery. All three of them report that the ability to retain broadcasting licenses in the EU forces them to move from the UK. One firm, Discovery, motivates its decision to locate to the Netherlands by naming the ‘tremendous commitment and understanding of their business needs by the Dutch regulators’ and ‘the dynamic market’. I am unable to confirm the Dutch regulator’s, ACM, efforts regarding aiding Discovery. However, the Dutch audio-visual market is indeed dynamic and ranks eight in Europe by established audio-audio-visual services, following much larger countries as Russia, France, Italy, the UK and Germany (Schneeberger, 2019).
BMW has shifted operations from the UK to the Netherlands but was already active there. Trig Avionics, Pirate’s Grog Rum and Ferrovial did not have operations in the Netherlands but did not state specific reasons for resettling there either. Their motivations remain unclear.
TEC Farragon opens a ferry line between Schotland and the Netherlands to bypass customs at Dover. However, a line between Denmark and Schotland would be shorter. I speculate the superior connectivity of the Netherlands to be decisive but am unable to prove this.
Rex London is a trading house that motivates their choice for the Netherlands in the following way: ‘We chose Holland because of its geographical location for distribution throughout Europe. Also from a point of view of setting up companies, Holland is a good deal easier than somewhere like France where the administration is quite arduous.’ Indeed, the Doing Business 2019 report from the World Bank Group ranks the Netherlands fifth on ease of starting a business in Europe (Doing Business 2019, 2019).
6. Discussion & conclusion
There is a significant positive effect on the share price of firms when they announce to be relocating to the Netherlands. This is especially true for firms operating in the financial and pharmaceutical sector. For financial firms, the presence of the Amsterdam Internet Exchange, the competence of the Dutch financial regulator and the abundance of other financial firms are motivations to resettle in the Netherlands. For pharmaceutical companies, being near the EMA is desirable. For firms in other sectors, the connectivity and quality of life are found to be motivators. However, for many moves hailed in the Dutch press, a prior presence in the Netherlands was often found. This is for example the case with BMW and Philips. The sectoral differences in share price impact might further be explained by the Brexit impact which differs from sector to sector. Ramiah et al. (2016) estimate the negative impact on the financial sector to be the largest, which correspond with the results found in this study.
Overall, the fear of losing passporting rights and access to the European single market appears to be the driving factors in moving out of the UK. None of the firms studied
motivated their decision by an expected downfall in the UK economy. It should be noted that the nature of some relocations studied do not effectively have an impact on the firm’s
consequence, there might not be an impact on the cost drivers of the firm and consequently no impact on the share price.
Lastly, during this thesis, it proved difficult to find firms publicly stating they left the UK due to Brexit. Most of the information used was gathered in news articles instead of official press releases, which are considered to be less reliable. This might not only have an impact on the robustness of the found results, but might also be subject to further research in the future. Why is it that firms are so reluctant to openly discuss their Brexit plans and would it not be better to be more transparent? Other questions this thesis raises are related to the share price differences in firms relocating to the Netherlands and other European countries. Furthermore, as previous research indicates, a headquarter relocation is often accompanied by a positive impact on share prices. Further research should determine if the impact found in this study transcends ‘regular’ effects and if these effects can either be attributed to the Brexit or to firms relocating to the Netherlands. Concluding, this study could be built upon when the future of the Brexit is more clear and a larger sample size might be available.
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