French investments in the Netherlands

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Graduation thesis

French investments in the Netherlands

Rochelle Billiottet

International Business and languages Student number: 38750

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Preface

As a French student studying International business and languages this year in the

Netherlands, what better subject could be found than studying French presence in the

Netherlands? A way to find out how much this small country matters to France, is by

looking at the investments that are made in this country. Both countries were the founders

of the European Union and have since then developed and increased their bilateral

exchanges. Known for centuries as a nation of successful traders, the Dutch are

internationally oriented by nature. This small country that sees itself smaller than it really

is, ranks in the top ten most exporting countries worldwide. It always tries to defend its

position among all these other big countries. However this nation has become very

dependent on foreign trade and therefore also on other countries’ economy. So we can

easily understand why the Netherlands invests in France for instance. But it is not

immediately obvious why French investors choose to invest in the Netherlands. Thus this

is the reason why I undertook this research.

First of all I would like to thank Mr.Ton Veraart, director of Lesire & Partners NL, who gave

me the opportunity to carry out this research. Also special thanks to all those who have

devoted their energy and their time to help me in my research: Mrs.Orianne Gannac from

the French Chamber of Commerce and Industry in the Netherlands, Mr. Jacobs from the

Netherlands Foreign Investment Agency, Mrs Edmee Breure from the French Economic

Mission in the Netherlands, Mr. Hidrio from the French Foreign Investment Agency and

Mrs Sul-Kuijpers, teacher at the Hogeschool Zeeland.

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Abstract

This thesis about French investments in the Netherlands tries to explain why this big

country invests in a small country like the Netherlands and also why the Netherlands is a

privileged location for foreign establishments.

The first chapter is a brief presentation of the company where I led my research.

Chapter 2 is the theoretical part aimed at explaining the most important aspects of foreign

direct investments. This part is based essentially on literature regarding foreign investment

strategies. There are many factors influencing the selection process for investments in a

particular country. In this part we will see why companies invest abroad and the benefits of

foreign direct investments. We will also look into some attractive criteria that make a

country attractive for foreign direct investments.

Chapter 3 presents the Dutch economy and the general trend of foreign direct investments

in the country. The Netherlands has always been an international oriented country and is

an attractive country for foreign direct investments. We will see why it is so attractive, who

invests in the Netherlands and in which fields?

Chapter 4 deals with French foreign direct investments in general. It is interesting to have

first a general look on French investments and find out the other countries that French

investors target. In this chapter we will also look at France’s foreign trade relationships and

the trend of foreign direct investments in France. France is a big investor abroad however

inward FDI in France is less significant and this might be explained by its old habits of

protectionism.

Chapter 5 is the last part where we will try to answer the question why do French investors

choose for the Netherlands? To answer this question we will look first of all at the

Dutch-French commercial relationship and we will find out that these countries are

complementary in their exchanges especially in the agribusiness, energy and transports.

We will follow the evolution of French investments and their importance in the Netherlands

compared also to the other countries. We will see the sectors that French investors find

attractive in the Netherlands and who are the big French investors. Finally we will find out

that French investors are willing to invest more in the Netherlands, which became one of

the “priority” targets for French foreign direct investments. The research on French

investments in the Netherlands came also with a small survey of French companies that

established affiliates in the Netherlands. The first survey that was carried out was not

successful, however the second survey had better results. The second survey was aimed

at trying to find out if French companies still find the Netherlands an attractive country for

investments.

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Introduction

OECD countries’ traditional role as net providers of foreign direct investments (FDI) to the rest of the world grew since 2004. Since 2004 most of the money went to developing countries. As in earlier years, China and a couple of Asian financial centres remain the largest recipients, but FDI into a range of countries, including Russia, India and much of South America, has also picked up lately. On top of this, several of the more advanced developing countries are emerging as outward investors, their national companies establishing subsidiaries in neighbouring countries and increasingly also on a more global basis.

FDI experts, transnational corporations (TNCs) and investment promotion agencies (IPAs) and the United Nations' agency predicted FDI would continue to grow over the short and medium term. The UNCTAD (the United Nations Congress on Trade and Development) surveys find out that prospects for FDI vary significantly by industry. The outlook for the services sector will continue to be more positive than for the manufacturing or primary sectors. Industries expected to be at the forefront of FDI growth are computing/ICT, public utilities, transportation and tourism-related services in the services sector; electrical and electronic products, machinery and metals in the manufacturing sector; and mining and petroleum in the primary sector.

In the short term, IPAs expect the US to be by far the most important source of global FDI flows, followed by the United Kingdom, Germany and China.

More than 50% of experts and TNC respondents expected mergers and acquisitions to be the primary vehicle for FDI in 2006. In contrast, most IPAs, which are from developing countries, expected greenfield investment (new investment projects) to be most important. Non-equity investment, such as through strategic alliances or licensing, is also expected to remain strong. The UNCTAD indicated that there are a number of reasons to be cautious about FDI growth prospects in the short and medium term. They believe that protectionism, reduced growth in industrialized countries, the financial instability of some major economies, global terrorism and the volatility of petroleum and other raw material prices are major threats.

Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investments, which may cross borders, but does not offer such control. Firms, which source FDI, are known as ‘multinational enterprises’ (MNEs). In this case control is defined as owning 10% or more of the ordinary shares of an incorporated firm, having 10% or more of the voting power for an unincorporated firm.

FDI statistics record both the initial investment and all subsequent investments made by the direct investor, in the form of equity capital, or in the form of loans, or in the form of reinvesting earnings. Types of FDI:

 Greenfield investment  Brownfield investment  Merger and acquisitions

 New forms of partnerships (joint ventures, strategic alliances, licensing and other partnership agreements)

 Greenfield investments: direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace.

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 Brownfield investment: Expansions or re-investments in existing foreign affiliates or sites.  Mergers and acquisitions: occur when a transfer of existing assets from local firms to

foreign firms takes place, this is the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company.

 New forms of investments: joint ventures, strategic alliances, licensing and other partnership agreements.

The choice of the form of investment is based on various strategy considerations.

There are two main indicators for foreign direct investments: FDI flows and stocks. FDI stocks refer to the end of the recording period, flows refer to the recording period.

 FDI Flows: FDI flows are recorded in the Balance of Payments financial account. Total FDI flows are broken down by kind of instrument used for making the investment: - Equity capital

comprises equity in branches, all shares in subsidiaries and associates and other contributions such as the provision of machinery.

- Reinvested earnings

consist of the direct investor’s share (in proportion to equity participation) of earnings not distributed by the direct investment enterprise. This recording represents not distributed income as being earned by the direct investor and reinvested in the direct investment enterprise at the same time.

- Other FDI capital (loans)

covers the borrowing and lending of funds, including debt securities and trade credits between direct investors and direct investment enterprises.

 FDI Stocks: FDI stocks are recorded in the International Investment Position. Similarly than for flows, FDI stocks are broken down by kind of instrument:

- Equity capital and reinvested earnings - Other FDI capital

is the stock of debts (assets or liabilities) between the direct investors and the direct investment enterprise.

FDI stocks and flows are related to each other, the level of stock changes according to the flow changes. If FDI flow rises, so does the stock.

Data in FDI can vary between investment agencies and central banks. Unlike foreign investment agencies, data of central banks include mergers, acquisitions and other forms of investments for instance joint ventures.

My research is based on data out of the period 2004-2006 according to the available data that I could find. Some data could not be more current than 2004 since some studies and researches need minimum a year to collect all the information and than need time to be analysed.

The research deals with the commercial relationship between France and the Netherlands and especially with French investments in the Netherlands. This leads to the problem formulation: Why do the French invest in the Netherlands?

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Lesire & Partners

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Chapter 1: Presentation of Lesire & Partners

My tutor company Ton Veraart gave the assignment. To give a clear picture of the organisation, where I carried out my research, here below is a diagram of the different components of the organisation:

100% 50% 100%

30% 70%

Veraart +

Partners

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The company’s customers are mostly international oriented. Besides the network is also represented with partners in:

- United Kingdom - Switzerland - Germany - Spain - Italy - Czech republic - Poland

Lesire & Partners is a public company (Plc) created in Waterloo, in 1999. The organisation was created by Leon and Louisa Lesire, who already had experience in training and consultancy for more than ten years. The organisation expanded rapidly and the headquarters were transferred to Brussels. Afterwards two other similar companies were founded in Paris and Amsterdam. A legal structure was installed with a French SARL ( Société anonyme aux ressources limités) as a holding with branches in L&P Netherlands and Belgium.

Lesire & Partners is a multidisciplinary team of senior consultants, who work together on an international and multicultural plan. The company delivers by a systemic approach tailor made solutions to companies and organizations based on the principle “no cure, no pay”. Their objective is delivering added value to all the stakeholders: companies/organizations and their managers, the human resources, the shareholders and the external partners. Lesire & partners provide services such as:

Performance consulting, mentoring the process of change, management training, sales training, strategy development…

L&P builds tailor made solutions and different pedagogic supports such as video, E-Training, tests, group exercises...

It collaborates with an international network of privileged business partners for state of out tools and works with the concept “product, process, people”.

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Chapter 2: General theories on investments

The problem formulation: “Why do the French invest in the Netherlands?” raises several theoretical questions about foreign direct investment in general. Actually why do investors decide to invest abroad and how do they select the country? So this leads to the theoretical part of this thesis, which will be discussed in the following chapter. The theoretical part consists in answering four main questions about foreign investment decisions:

1. What pushes investors to invest in foreign countries rather than in their home country? 2. What are the main benefits of foreign direct investment?

3. What are the main factors playing in the decision-making process for foreign investment in a particular country?

4. What makes a country attractive for foreign investment?

1/ What pushes investors to invest in foreign countries rather than in their home country? The reasons why investors rather invest in a foreign country than in their home country can be for the following reasons:

- To widen one’s market and increase demand for the product. That means acquire new customers and increase one’s market share.

- To enter a new market in order to improve one’s customer care. This has been the main reason for more than 90% of investments made in sales, marketing and distribution.

- To find new opportunities that complete an insufficient domestic demand.

- To get rid off an excessive production. That is to say that the home market is saturated and one wants to find new demand.

- To improve one’s supply procurement

- To maintain or increase one’s capital profitability

- To reduce production costs by relocating to countries where the costs (labour costs) are lower.

The reasons why companies invest abroad can also be explained by theories such as the push and pull factors.

- Push factors: variables that give a push to occurrence of foreign direct investment flow from a home country.

- Pull factors: variables that attract a foreign direct investment flow towards a host country. The theories of push and pull factors will be explained in further details in the third part of this chapter, dealing with the decision-making process for foreign investment.

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2/ What are the benefits of foreign investments?

- Technology: Multinationals are more Research & Development intensive.

- Innovation: Foreign Direct Investments can intensify local market competition, creating the stimulus for innovation.

- Increased domestic investment: It is estimated that $1 FDI leads to an extra $1 domestic investment.

- Export market access: FDI is more export intensive than domestic investment and can lead to local company exports.

- Foreign exchange: FDI can be a key source of foreign exchange in countries with low savings or access to capital.

- Wage premium: Foreign owned companies pay higher wages – a key objective of

attracting inward investment.

- Job creation: FDI creates direct jobs. It also creates indirect jobs. Anecdotal evidence suggests 1 manufacturing FDI job creates 3 indirect jobs.

- Higher productivity: Productivity in FDI is higher than domestic firms, often by up to 40%. Outward FDI also raises domestic productivity.

- Distributional objectives: Inward investment can act as a catalyst for growth in poorer regions as long as they have adequate absorptive capacity.

- Catalyst role: FDI can act as a powerful catalyst for supply chain development, cluster development, and raising the brand value of a location.

Because of these benefits attracting foreign direct investment has become a central component of industrial policy in developed and developing countries across the world. Companies make investment location decisions on the basis of their information pool and understanding of an area’s location “offer”. Investment promotion is therefore an essential component of attracting inward investment, and there has been a rapid growth in the number of investment promotion agencies (IPAs) across the world. Surveys carried out by the UNCTAD(United Nations Conference on Trade and Development) and Corporate Location magazine estimated that 30 new IPAs were formed every year in the first half of the 1990s.

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3/ What are the main factors in the decision-making for foreign investments in a particular country?

At the end of the 19th Century, the famous economist Thomas Jefferson stated that:

‘Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gain’.

Jefferson emphasises the footloose nature of Multinational corporations (MNC). It is this mobility of investment that provides the possibility to influence the location decision of MNCs.

Most companies consider only a small range of potential investment locations. Many other countries are not even on their map. So the question is what are the factors influencing the location of foreign direct investment?

3.1 Location theories

According to studies led by C.J Pen in his book “Wat beweegt bedrijven”, there are three groups of location theories that may be used to study business location issues and analyse the forces that drive the selection of business locations: (neo)-classical, institutional, and behavioural location theories:

 Neo classical

Weber en Lösch and other neo-classicists state that location choices are made by rational and well-informed decision makers. The choice occurs in a homogenous space in a situation of perfect competition. However these assumptions do not reflect the complexity of reality. This means that this theory is hardly applicable, despite a growing awareness among its adherents that it should take risks and incomplete information into account. This theory considers just a limited number of economic variables influencing the decision-making process for foreign investment such as, raw materials, energy prices, transport distances, availability of the production factors, level of the consuming market.

Weber’s studies deal with the location factors. He formulated a theory about location factors based on: transport costs, labour costs, and urban agglomeration strengths. According to Weber, entrepreneurs will locate plants in response to three factors of transport, labour availability and advantages or disadvantages of clustering with other industries, at points of least cost to the firm. These points are where the weight and distance costs involved in assembling raw materials and distributing finished products are at a minimum. As far as clustering is concerned according to the economist Marshall, firms established in the same site can benefit from a large specialised labour market, an easier access to the necessary inputs for production as well as the possibility to benefit from technological advantages due to the geographical proximity. However the agglomeration process can also have a negative impact. Indeed if the agglomeration is strong, competition can be even harder. In general experts have proven that the number of firms located in the same particular zone have a positive impact on the localisation of other firms.

Christaller and Hotelling had also location theories based on factors which where more “market oriented”. That is to say that entrepreneurs will base their choice on scale advantages, the level of de consuming market and profit maximisation.

Lösch is considered as the real founder of the location factors theory based on costs and profits. He introduced the concept of urban agglomeration advantages. This concept means that it is more advantageous for companies to be all located in the same urban surroundings with different kind of companies.

Finally the neo-classical theory to explain location choices is especially giving the importance to “profit-maximizing”. That is to say that entrepreneurs locate their company where they can make the highest profits. All in all we can say that these neo-classical models are based on profit

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maximisation theories that is to say that investors choose a location only if this location generates superior profits than the other alternatives. Every location is characterised by values taken by the localisation factors: intensity of demand in the potential geographical zone, localisation costs, and concentration of other firms.

This neo-classical theory is based on hypothesis such as rationality and perfect information on behalf of the decision-makers. It explains the choice of a location by identifying main criteria’s or localisation factors. However localisation decisions are not that rational and resulting from an optimiser calculation. The process is more complicated; indeed many other local characteristics are able to have an effect on the operational level of the new plant.

 Institutional location theory

Because corporations are steadily becoming more international, institutional location theories formulated by Harvey and others focus on the investment strategies of multinational and large national companies. The spatial organisation of the primary process and the actors involved are the central elements in these theories, while the location problem is moved into the background. The emphasis is on the network or the region in which the company operates. According to some researches the probability of establishing a subsidiary somewhere in a country depends on the national and regional variables.

Despite the attention paid to investment strategies, the corporate decision-making process is regarded as secondary. The institutional approach emphasizes the importance of the national policy, labour market and corporate strategy in the location decisions of multinationals and Small and Medium Enterprises (SMEs). The theory stresses the role of institutions in the choice of the location. The factors that influence the choice of a location are the quality of the R&D institutions, science parks, the infrastructure for technology transfers, financial institutions. In this case firms decide to settle in locations where there is a concentration of all these factors. This results in “regional collective learning within territorially-localised socio-cultural and institutional environments”.

 Behavioural location theory

Pred, Stafford and others based this theory on a more realistic perspective on human beings and businesses. These theories regard “the location of factories as a decision-making process”. The location problem is analysed by studying corporate decision-making process. The problem is that behavioural location theories have not focused on the process; instead they have paid a great deal of attention to the behaviour of the entrepreneur as a subjective decision-maker a concept that is difficult to operationalise. The theory is widely used in the international literature.

Pred is considered as the founder of the behavioural location theory. He attaches importance to the decision-making process within the firm. The behavioural theory considers a company as a more learning, evaluating and processing organism rather than a calculating and rational organism like in the neo-classical theory. The essential terms in this theory are uncertainty, risk and personal perceptions. The locational choice is part of a strategic or long-term investment decision that is complex, uncertain, inherently subjective and conducted by individuals or groups of decision makers with multiple goals. The process of choosing a new location expose companies to a new environment that they hardly know and on which they only have imperfect information. The internal management and organisational structure have a great influence on the choice of a location. Economists like Cyert and March consider that decision-makers choose a location while limiting the amount of resources (in time and money) devoted to research of information on the different geographical locations. That is to say that entrepreneurs favour the geographical areas for which they can easily find specific and detailed information concerning their business. This information can come from their other subsidiaries already located in those areas or from other companies

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having the same activities or from their local personal network. Thus here comes the agglomeration effect. Indeed, multinationals have imperfect information on potential foreign sites. Thus the fact of knowing that other companies are already located there can play a role in the decision-making process. When companies decide too invest in a foreign country they want to reduce the risk as much as possible, so the location of other subsidiaries can be seen as a positive signal. According to the economists Belderbos and Carree, the preference for known locations changes according to the characteristics of the company. Thus a SME (small and medium enterprise) is more likely to adopt this attitude since they do not have the same financial means as big companies so they would like to limit the financial risks as much as possible.

3.2 Hypotheses on determinants of foreign direct investments

Robert L.A.Morsink a Dutch academic, economist and advisor for companies and government agencies developed a theory, the MOSAIC model (MOdel for Spatial Analysis of Investment Conditions) in his book “corporate networking and foreign direct investment”. This theory was developed in order to analyse the geographical mosaic of foreign direct investment. Based on his studies four hypotheses on determinants of foreign direct investment came up:

- Push factors: variables that give a push to occurrence of foreign direct investment flow from a home country.

- Pull factors: variables that attract a foreign direct investment flow towards a host country. - Stimulus factors: variables which are typical for a bilateral relation between a home and a

host country, and which give a positive impulse to the occurrence of foreign direct investment on this bilateral relation.

- Friction factors: variables which are also typical for a bilateral relation between a home and a host country, but which give a negative impulse to the occurrence of foreign direct investment on this bilateral relation.

3.2.1 Push factor

 Knowledge transfer hypothesis

Transnational flows of knowledge may be defined as the transfer and utilisation of different types of knowledge (marketing and technological knowledge, work practices, managerial techniques, etc…) between the multinational corporation’s parent company and its subsidiaries.

It is an important push factor and provides new opportunities for combining them with locational advantages of host markets. A locational advantage is the extent to which enterprises find it profitable to locate any part of their production facilities outside the country due to locational attractions or location specific endowments. This implies a knowledge transfer from the home country to the host country. Once they gained locational advantages this will lead to new opportunities that will become foreign direct investments.

If in a specific location the knowledge intensity is high and increasing, this may be an interesting locational endowment for certain types of economic activity. The economist Pearce has identified a positive relationship between R & D- intensity and internationalisation, which result in new foreign direct investment.

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3.2.2 Pull and stimulus factors.  Market potential hypothesis

A particular locational advantage is the attractiveness of the market in the host country or the demand potential. This is determined by the number of (potential) customers and their level of income or purchasing power. This constitutes a potential for the (future) market revenues. Hence, foreign market potential is an important pull factor.

Market potential hypotheses have various links with similar hypotheses described by the economist, Agarwal who made a survey of determinants of foreign direct investment. Firstly, he identifies the “market size hypothesis”, which states a positive relationship between the size of the foreign market and foreign direct investment. Secondly, Agarwal mentions the “output hypothesis”, which argues that with growing sales volumes determined by the number of potential customers and their income, companies are likely to engage in foreign direct investment. Academics such as Root, Ahmed, and Dunning found statistically significant relation between foreign direct investment and market demand and market growth.

The demand factor represents the potential demand for a company. The demand variable depends on the company’s zone of establishment. Most of the time the GDP indicator helps to measure the level of demand. The GDP factor refers more to the potential market and the demand access. Companies favour countries and regions where the potential demand is high.

The higher the rate of economic growth, the greater the investment inflows. Foreign investors could be attracted by high growth rates, and high growth rates could be the result of foreign investment.

 Labour cost hypothesis

Another locational advantage may be that the host market provides attractive inputs for a company’s production process. A company can consider moving production to the host country and internalising the availability of cheap input provision in its corporate structure. In his product cycle, the studies of Vernon (International investment and international trade in the production cycle) indicate the availability of cheap inputs, in particular cheap labour, as an essential determinant for moving production capacity abroad. Hence, cheap inputs attract foreign direct investments and can thus be interpreted as a pull factor.

However this does not mean that companies invest only in countries where there is cheap labour a company may choose for a location with skilled labour, accepting the higher labour costs.

 Return on investment differences hypothesis

Hypothesis based on theories in which the cost of capital determines the allocation of investments. The differential rate of return hypothesis is based on the traditional theory of investment, in which the firm seeks profit maximisation.

An investor will engage in foreign direct investment if he expects the return on this investment to be higher than the return from other modes of internationalisation.

An investment is profitable if its cost is inferior to the revenues that it will generate. The entrepreneur calculates profitability by comparing the cost of the investment and its expected revenues and from that he deduces the profit. The expected profitability of the investment is related to the profits coming from the capital already committed. Thus the entrepreneur will invest where profitability is high. The rate of return can be considered as a stimulus factor to invest in a particular country. However, although relevant for investment decisions, it can be considered questionable if a company builds its foreign direct investment decisions on the net return as a major determinant. In view of corporate strategies, long term sustainability of market revenues and efficient production and distribution are likely to be more important.

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 Taxation differences hypothesis

A hypothesis that could be related to the return on investment hypothesis. If the level of taxation in a host country is substantially lower than in the home country, a company may want to invest more in the host country in order to benefit from a higher after tax return on investment due to lower tax levels.

Various authors have studied the relation between taxation and foreign direct investment. Studies of Devereux and Freeman identified the after tax cost of capital as a relevant investment determinant. If the difference in taxation between two countries influences foreign direct investment considerably, it may be the case that favourable taxation policies in host countries exist. Thus the taxation differences hypothesis can also be considered as a stimulus factor.

3.2.3 Friction factor

 Cultural differences hypothesis

Another hypothesis, which could influence foreign direct investment decisions, deals with the existence of cultural differences. In the case of a large cultural difference between the home and the (potential) host country, an economic interchange may be blocked. Cultural difference is a friction factor to host market provision.

For the foreign direct investment mode cultural differences could be stronger barrier than for other modes. This is due to the fact that foreign direct investment is a far-reaching mode of internationalisation, as in this mode the foreign owner takes full or substantial control on the foreign entity. If local habits and customs of employees in the host country are very different from those of the managers from the home country, serious conflicts could arise. This could lead to higher production and transaction costs.

3.2.4 Stimulus factor

 Trade intensity hypothesis

The trade intensity hypothesis deals with the relationship between foreign direct investment and trade. Foreign direct investment and trade could be considered as complementary. For instance: creating a local production facility will incur new trade flows: imports of inputs and semi-finished products for local assembly and exports of manufactures from the local production unit.

In the scenarios of the economists Vernon and Hakanson and in the model of Buckley and Casson, the foreign direct investment mode of internationalisation is chosen, when a certain level of trade is achieved. The decision to switch to the investment mode is based on the intensity of trade having reached a certain sufficient level in the past.

Trade intensity can be considered as a stimulus factor since the better the trade relationships are between the home and the host country the more the home country will be intended to make further investments in the host country. Trade intensity may also be considered as an indication of the level of trade liberalisation or economic integration between any two countries. One may expect a positive impulse to mutual trade when trade barriers are removed. Further, one may expect high trade intensity when integration processes have reached higher stages of economic integration.

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3.2.5 Stimulus or friction factor  Exchange rate hypothesis

Economists have theorised on the relation between foreign direct investment and currency fluctuations. One of these economists, Aliber, postulated a relation between foreign direct investment patterns and the relative strength of currencies. Firms from strong currency countries are more likely to invest abroad than those from weak currency countries due to lower costs for borrowing and more favourable capitalisation of foreign earnings.

The view of Aliber advocate clearly that exchange rate fluctuations matter, but that their impact depends on many circumstances. Fluctuations influence the internalisation question via an impact on foreign revenues and costs. Also, the value of invested capital can be harmed when currencies depreciate. On the other hand, exchange rate movements can create opportunities to purchase foreign assets at cheap price. This depends on the direction in which the exchange rate moves and which risks exist for the future development of this rate.

Therefore, the relation between possible investment actions in view of the direction of exchange rate movements is assessed here.

Table: Home country firms investment actions in view of exchange rate movements towards third currencies. Home country currency Host country currency Bilateral exchange rate*

Home country firms’ view on host

Effect on FDI flow from home to host country stable stable Stable stable appreciating depreciating stable increasing decreasing

single currency area expensive host attractive host no major effect friction stimulus appreciating appreciating Appreciating stable appreciating depreciating decreasing indeterminate decreasing attractive host indeterminate attractive host stimulus indeterminate stimulus depreciating depreciating Depreciating stable appreciating depreciating increasing increasing indeterminate expensive host expensive host indeterminate friction friction indeterminate

*a home country’s currency per unit of the host country’s currency.

This table identifies possible foreign direct investment actions companies may take when the exchange rate between home and host country currencies changes. Three situations can occur. First, the bilateral exchange rate remains stable, which implies no major impact on foreign direct investment decisions. For instance in the European single currency area, the fluctuation of exchange rates have no major effect on FDI flows from home to host country. Second, the bilateral exchange rate increases. This makes the host country expensive for the home country investors. This causes a friction to invest in the host country. Third, the bilateral exchange rate decreases. The host country becomes more attractive for home country investors. The bilateral exchange rate changes cause a stimulus to invest abroad. If the development of the bilateral exchange rate is indeterminate, any of the three situations may arise.

However the volatility of exchange rate has to be taken into account. Although the movement of the exchange rate may then be favourable for foreign direct investments, the uncertainty of its future value may block the actual investment.

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 Transport cost hypothesis

Transportation costs are important component of transaction costs in economic geography. Other transaction costs could relate to costs of coordination and communication and costs to transfer funds (foreign exchange transaction costs). As a foreign direct investment flow can be seen as a transaction, transport costs are a relevant determinant. Therefore, a transport cost hypothesis, in which transport costs are a friction factor, puts forward a negative relation between foreign direct investment and transportation cost.

A qualification needs to be made regarding the relation between trade and foreign direct investment. In the case of trade from the home country to the host market, goods will have to be transported physically. Distance thus incurs transportation costs, which are highly relevant for the price of the product on the host market. The physical distance may even have stimulated the choice for the foreign direct investment mode.

 Unemployment rate hypothesis

Another variable that can be taken into account is the unemployment rate. High level of unemployment can be seen as unattractive for a company since it shows some rigidity in the labour market. However a high level of unemployment can also be considered as a positive thing if companies see it as an existing available work force.

 Political risk hypothesis

Several researchers have tested the influence of political stability or, conversely, political risk, on foreign direct investment flows. Early survey studies of the foreign investment decision process indicated that political instability was one of the main factors in the decisions of investors not to invest in a particular country. Researchers, Basi and Aharoni led interviews and surveys of executives in multinational corporations and concluded from their research that, after market size and growth, political instability was the dominant influence on investment flows. In a study conducted by Root and Ahmed, political stability was one of the variables that were found to be statistically significant. The hypothesis is that the more politically stable the country, the greater the inflows of foreign direct investment.

3.3 A model of a decision-making process

Theories about strategic localisation show that there are several geographical levels during the decision process: First the company selects a wide geographical zone, then a country, afterwards a region, then a city and finally all this leads to the final site for the establishment of a production unit. The process leading to the choice of a location for investments may have what we call a hierarchal structure.

In a hierarchal structured model, we suppose that the company hesitates at first between several countries, once the company has chosen a country it will choose the region where he wants to establish. Variables such as demand, labour costs, unemployment rate have great influence on a choice of a location. However these influences do not work at the same geographical level.

The demand factor has a positive impact on the choice of a location on a regional level. The market potential changes according to the different regions within a country. The higher the market potential is the more companies are likely to establish in this region. Once the companies have chosen the region where they want to establish their subsidiary, they will try to gain as much share as possible from the whole potential demand of the host region.

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The labour cost factor has a significant influence on the national level. That is to say that the level of wages is an important factor influencing the localisation strategy between different countries. 3.4 Factors in the decision-making process

There are many factors that can influence the decision-making for foreign investments in a particular country. We can divide these factors in several categories:

Economic factors:

- Macroeconomic stability

- High and long term economic growth - Stable labour force

- Availability and labour costs

- Easy and restricted access to markets - Market demand and supply

- Level of disposable income - Stability of currency

- Exchange rates - Market competition - Inflation rate

- Balance of payments conditions (export/import) - Market growth

- Attractiveness of the different industrial sectors - GNP trends

- Interest rates - Unemployment rate - Return on investment rate Political factors:

- Political stability and risk

- Policies governing the formation of business as well as its operations - Macroeconomic policies

- The supply-side “product development policies” - The inward investment policies

- The specific regional policies - Stability of economic policies - Taxation policy

- Social welfare policies

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Socio-cultural factors: - Levels of education - Lifestyle changes - Social mobility

- Cultural norms and social structures

- General acceptance and quality of life for the expatriate employees - Labour skills and education

Legal factors:

- Foreign trade regulations - Environmental protection laws - Employment law

- Health and safety laws Infrastructure factors:

- Infrastructure quality and costs ( transportation, proper utilities, support services, telecommunications, internet)

- Technological infrastructure ( R&D, patents, university-based clusters, graduates) Production factors:

- Availability of affordable land and proper buildings for the manufacturing plant

- Availability of raw products and natural resources, required in the manufacturing process. Other factors:

- Geographical location for logistic reasons

- Support available from the investment promotion agencies (IPA) and other agencies - Networks

- Presence of qualified suppliers or business partners.

- FDI history of the host country and presence of other multinational investors - Services to enterprises

- Access to credit

- Access to short and long term funding

- Predictable and liberalized framework for investments - Investments incentives and benefits

Investors will take into account the factors mentioned above before making a foreign investment decision. However we can say that there are principal motivating factors in the location decision that are different according to the type of enterprise. The principal motivating factors in the location decision of particular groups of investors could be summarised as follows:

Export-oriented enterprises: " access to market " cost of labour

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" export incentives " realistic exchange rate

" availability of proper buildings for the manufacturing plant Local market-oriented enterprises:

" market size and growth " protection from imports " competition

" rate of return on investment Multinational Corporations:

" globalisation considerations " access to end-user markets

" political risk and government attitudes " stability of economic policies

" infrastructure quality

" FDI history of host country and presence of other multinational investors Small and Medium size enterprises:

" investment incentives " stability of economic policies " barriers to entry

" market supply and demand " access to credit

Other examples :

The research of geographical proximity with the market and the company’s customers mostly concerns companies in the service sector.

The willingness to reduce the financial costs for the opening of a new factory. Here the company looks for advantages and tax incentives. This concerns especially manufacturing companies. The willingness to have access to localised knowledge and specific resources. This concerns companies, which look for localised innovation activities.

4/ What makes a country attractive for foreign direct investment?

4.1 Examples of what makes a country have an attractive investment climate: - Political stability and risk

- Macroeconomic stability

- High and long term economic growth - Investments incentives and benefits

- Predictable and liberalized framework for investments

- Policies governing the formation of business as well as its operations - Stable labour force with properly structured labour conditions and costs - Access to short and long term funding

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- Availability of affordable land and buildings

- Proper utilities and transport infrastructure and support services - Easy and unrestricted access to markets

- Level of market demand

- Production factors: the availability of raw products and natural resources required in the manufacturing process

- General acceptance and quality of life for the expatiate employees - Cultural norms and social structures

- Level of disposable income - Stability of currency

4.2 Examples of some countries’ strategies to attract foreign direct investments:

Ireland

Ireland’s International Financial Services Centre (IFSC) offers new offices, reduced 10 per cent corporate tax and other tax benefits, a recruitment service and an expatriate support package for headquarters projects.

France

The French techno poles (example: Sophia anti-polis) offer high quality sites and properties in specialist industrial parks and locations offering a very high quality of life to attract skilled R&D people, training grants and an expatriate support package. The sites are supplied by the private sector. To support high-tech clustering, techno poles have on-site research facilities and links to research establishments and universities. Techno poles were set up to attract R&D investment in specific sectors, such as multi-media, food technology and electronics.

Singapore

Singapore’s life science strategy aims to encourage companies to move into higher value-added manufacturing, increase and commercialise R&D and build up value adding

partners. To achieve these objectives the Singapore Economic Development Board (SEDB) has set aside 250 acres of land as a “Pharma Zone”. A catalyst initiative

to develop a cluster of local and foreign pharmaceutical and biotechnology companies — and a Technopreneur Centre has been developed to support Small and Medium Enterprises. These initiatives are integrated with the activities of other government

departments, and there is a wide range of incentives tailored for manufacturing, R&D, new start-ups, and for developing links with research institutes.

USA ( New York)

New York’s “new economy” strategy is designed to attract “new economy” information technology and e-business companies. Integral to this strategy is a cluster-based, catalyst initiative called 55 Broad Street. This initiative has been developed to stimulate and

attract high value-added, “new economy” activities. The block, designed for the new economy, includes dedicated broadband satellite telecommunication facilities. It is now

home to hundreds of small businesses. The occupants pay below market rents, and benefit from tax concessions and cheap utility bills.

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Canada (Quebec)

Quebec’s “new economy” strategy aims at developing higher value-added activities in Quebec, and in particular at developing Montreal into a new economy hub. Central

to this strategy is developing high value clusters around Montreal’s strong universities and high-technology industries and attracting R&D through very generous tax credits. To support the clustering of “new economy” businesses, a catalyst project was announced in Montreal called E-Commerce Place, based on the success of 55 Broad Street. This is a dedicated 275,000 square meter campus, targeted at e-commerce businesses.

4.3 Europe the most attractive area worldwide for foreign direct investment

According to Ernst & Young’s “European attractiveness survey 2005”, the European Union is the most attractive trading ground for investors. The European Union countries account for half of the world’s inward foreign direct investment (FDI) flows. With 450 million consumers it is the largest internal market in the world in terms of trading opportunities. The enlargement of the EU presents huge opportunities to investors. Each member state offers foreign investors advantages and facilities (tax treatment, geographical location, incentives, quality of infrastructures, skilled labour…).

Western Europe remains the most attractive economic zone for 63 % of investors. Central and Eastern Europe are increasingly viewed as ‘low cost” competitor for China. 31 % of international investment is directed towards central and Eastern Europe, more than France, Germany, Spain and Belgium combined. Poland and Hungary are challenging the traditional supremacy of Germany, United-Kingdom and France due to their competitiveness in terms of labour costs. Business leaders remain sceptical regarding an improvement in the attractiveness of Europe over the next 3 years. So investors would like to see an easing of regulatory and fiscal policies to encourage investment in Europe.

4.4 Most attractive countries for foreign direct investment

China and India lead, followed by the United States, as the countries for which FDI prospects are brightest. In India, where FDI flows have been low, location experts expect a major surge. For many developed countries, especially in Europe, which have traditionally been among the largest FDI recipients, prospects appear less bright than for certain developing countries such as Thailand, Malaysia, Singapore and the Republic of Korea. Poland and the Czech Republic also make the list of the most frequently mentioned countries with favourable FDI prospects, as they are expected to benefit from accession to the European Union. Mexico is the only Latin American country on this list.

For each region, experts ranked the countries they considered the top FDI locations in 2004–2005:

In the developed world, the United States was the top expected location for FDI, followed by the United Kingdom. Canada and France tied for third place.

In Africa, South Africa, Angola and Tanzania occupy the top three spots. South Africa is perceived as the most attractive location, while Angola and Tanzania are tied in second place. These two least developed economies have bright prospects in natural resource extraction industries, in Angola’s case particularly the petroleum industry.

In Asia and the Pacific, China and India are the most attractive destinations for FDI in the near future, with Thailand in third place.

In Latin America, the traditional magnets for FDI inflows – Mexico, Brazil and Chile – are expected by experts to continue to play that role, at least in the short term.

In Central and Eastern Europe, Poland and the Czech Republic occupy first and second place, while Russia and Romania share third place.

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According to the UNCTAD (United Nation Conference on trade and Development) here is the global ranking for the most attractive countries for 2004-2005:

1. China 2. India

3. United-States 4. Thailand

5. Poland and the Czech Republic 6. …

7. Mexico and Malaysia 8. …

9. United Kingdom, Singapore and the Republic of Korea

These countries are ranked on criteria such as financial structure, economic environment and quality of labour. According to the UNCTAD’s report on global investment prospects assessment here are the most attractive business locations for FDI for 2005-2006:

1. China 2. United States 3. India 4. Brazil 5. Russia 6. United Kingdom 7. Germany 8. Poland 9. Singapore 10. Ukraine

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Chapter 3 : Foreign direct investments in the Netherlands

1/ Presentation of the Dutch economy

After having passed through a major crisis since 2001, the Dutch economy had a slow recovery in 2004. In 2005 the economic situation of the Netherlands still has not improved. However according to the CPB (Centraal planbureau) the economy saw robust growth in the first quarter of 2006. The gross domestic product (GDP) was up by 2.9 percent on the year before, that is to say the highest level since 2000.

The pillars of the economy are foreign trade, industries of high technology and the services. The Netherlands is known for centuries as a nation of successful traders, internationally oriented by nature. Its economy is very dependent on foreign trade. More than half of the gross domestic product (GDP) is generated by the international trade, in particular by the Dutch imports and exports of food, chemicals and machines. In this last sector, the computers and the components of computers are the leading products. A substantial part of the imported goods, for example the computers, are intended for third countries. They are re-exported without to having to go through the transformation process, or through a tiny transformation. It is one of the aspects, which characterizes the activity of distribution of the Netherlands. The Netherlands import mainly machines, equipment, hydrocarbons (oil and natural gas) and vehicles.

In the agricultural sector, the principal cultures are the cereals, the potatoes and the horticulture. The breeding is also an important sector. The Netherlands has important natural gas resources. The principal industrial sectors are the agro alimentary, chemistry and petrochemistry. Printing works, the edition, pharmacy and the medical equipment are also important sectors.

The services are dominating and provide 70% of the country’s GDP. The first three buyers of the Netherlands are Germany, Belgium and the United Kingdom. The first three suppliers are Germany, Belgium and the United States.

The Netherlands is in the top ten most exporting countries in the world. For a country of such a modest geographical dimension with only 16 million inhabitants, the performance is exceptional. One of the characteristics of the Dutch economy is its openness to the world that attracts foreign investors.

2/ General trends for foreign direct investments in the Netherlands

Previous studies on foreign direct investment have shown that the process of economic integration in Europe has had a significant positive impact on FDI flows. In particular, the Single

European Act and the ongoing eastern enlargement of the EU have commonly been cited as important factors influencing the source and destination of FDI. Prior to the mid-1980s, European FDI was largely dominated by investments made by US companies. These flows were concentrated in the economies of Belgium, France, Germany, Italy, Netherlands and UK, which together gained about 90 per cent of total inward FDI. It is estimated that the stock of world FDI located in the EU grew from 31 per cent in 1985 to 41 per cent in 1998. At the same time, the relative importance of US investment diminished, with a decline in total share from 28 per cent to 10 per cent between 1984 and 1996. Foreign direct investments in the Netherlands grew strongly between 1985 and 2002.

In 2004, Foreign Direct Investments(FDI) decreased considerably, it was a real collapse compared to the year 2003 with a negative flow (flows of FDI in the Netherlands passed from 18,9 billion euros in 2003 to -1,5 billion in 2004). The Netherlands traditionally attracts a great number of foreign investors but the attractiveness worsened since 2000 because of high corporation taxes

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and a rise in labour costs. Thus, the IMD (International Institute for Development Management) relegated the Netherlands to the 15th place whereas they occupied the 4th place in 2003. In 2004 the Netherlands have invested more abroad than foreign investors in the Netherlands.

According to their latest figures from CPB expect a substantial investment increase for 2005. Dutch producers expect a 13 percent investment rise over 2004. In both 2004 and 2003, industrial investments had fallen from the previous year. The two most improving sectors are oil and chemicals, with forecasters predicting investment increases of 55 and 20 percent, respectively. These figures represent significant rebounds from the preceding years.

Entrepreneurs in the food, beverages and tobacco industry are the only ones expecting a dip in investment in 2005 – probably around 2 percent.

Public utilities (including energy companies) and extraction (oil, gas) likewise have positive expectations about investments for 2005. The entrepreneurs in public utility supply expect a 19 percent investment increase. Dutch entrepreneurs in extraction (oil,gas) are contemplating a 57 percent growth rate.

Industrial entrepreneurs became more positive during 2005 about investments in 2006. In the spring of 2005 they forecast a 17 percent dip in investments. The fact that the entrepreneurs became more positive fits in with the rise in producer confidence that started in August 2005. According to the annual figures from the Netherlands Foreign Investment agency (NFIA), a department of the Ministry of Economic Affairs, the number of foreign companies investing in the Netherlands has grown considerably over the past year. The NFIA was involved in 112 new investment projects by foreign companies in 2005, the highest number ever. This concerns so-called “footloose”1_{projects, for which the Netherlands is in competition with other countries, and} does not include takeovers or joint ventures. As a result these projects entailed the creation of 3121 jobs and the amount of investment represents 506 million Euros.

1

_{“Footloose investment projects”: The term “footloose” means having no attachments or ties; free to do as one pleases. Generally,}

footloose plants result from short-term direct investment that is not rooted in the local economy through supply or demand linkages. Footloose investments are multinational companies that have no commitment either to the countries in which they are based or to those in which they invest. However this does not mean that multinationals remain less longer than the local companies or that they are more “fickle” than local employees. Recent research suggests, in fact that they tend to stick around longer than local firms not because they are foreign but merely because they tend to be bigger and more efficient than average. Multinationals last longer because of their greater average productivity, their heavier use of capital and their larger size. They are attractive for the host economies since they transfer technology, know-how and productivity.

0 10000 20000 30000 40000 50000 60000 70000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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265 506 Investments (million euro) 2004 2005 102 112 Number of projects 2004 2005 2,475 3,121 Number of jobs created 2004 2005

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3/ The Netherlands an attractive country to invest 3.1 Ranking of the Netherlands

The Netherlands ranks fifth in the fifth annual AT Kearney/ Foreign Policy magazine Globalisation Index 2005. Singapore heads the latest ranking, followed by Ireland, Switzerland and the United States. The A.T. Kearney/Foreign Policy magazine Globalisation Index ranks 62 countries representing 85 percent of the world's population, based on 12 variables grouped in four categories: economic integration, personal contact, technological connectivity, and political engagement. The Netherlands ranks 5th, 11th, 8th and 4th corresponding to these four categories. In addition, the Netherlands seems also to be gaining some ground in several top-ranking lists indicating the relative attractiveness of investment climates. In the World Economic Forum’s Growth Competitiveness Index for 2005, the Netherlands moved up one place to 11th. And in IMD’s World Competitiveness Ranking for 2005 the Netherlands climbed from the 15th to the 13th spot. Furthermore, the Netherlands continues to rank high in the Economist Intelligence Unit’s global business environment ranking; at present it is ranked fourth for 2006-2010, after Denmark, Canada and the US. Finland, Singapore, Switzerland, UK, Hong Kong and Ireland are the remaining six of the top 10 on this list.

According to the UNCTAD investment brief 2005, large Transnational Corporations (TNC) ranked the Netherlands in the top 10 of the most favoured host country for doing business. In the percentage of top 100 TNC, with a foreign affiliate in the location, the Netherlands score with 95%. A location intensity index, which measures the share of top 100 TNCs that have at least one foreign affiliate in a host location, as many as 95 % of non-Dutch top TNCs were present in the Netherlands.

3.2 Reasons to invest in the Netherlands  Strategic location in Europe

The Netherlands provides a strategic location to serve and service markets within the European Union as well as central and Eastern Europe, the Middle East and Africa. The central geographical position of the Netherlands combined with a good accessibility and excellent infrastructure are only some of the reasons why numerous European, American and Asian companies have established their facilities in the Netherlands. It is a real gateway to Europe. Given its position it is particularly suited for so-called value-added logistics (VAL) activities, distribution hub and manufacturing service operations, after-sales services. It is also well suited for streamline customizing of products to European demands.

 International business environment

The Netherlands, long Europe's trading crossroads, is an obvious choice to locate a pan-European operation, whether it is a European headquarters, a Shared Services Center, a Customer Care Center, a distribution and logistics operation, or an R&D facility. An international outlook and openness to foreign investment is firmly engrained in the Dutch culture, and this has yielded a wealth of world-class business partners who know how to deal with global business challenges in today's economy.

French investments in the Netherlands

Graduation thesis