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Has Plant Expansion to Europe Become Too Risky?

July 15, 2015
At issue is whether international site selectors supporting U.S. companies should  default to Europe as the safe region of choice.

It’s hard to get away from the impression that for an American company considering international expansion, Europe isn’t what it used to be.

With the exception of Canada, an expansion to (Western) Europe has in the past been the obvious region for that first foray into overseas growth.

But in today’s environment, are the potential negatives outweighing the positives? This article considers whether international site selectors supporting U.S. companies should no longer default to Europe as the safe region of choice.

What does the data say?

Like most data, it depends on how its cut. If we look at Bureau of Economic Analysis data on foreign direct investment (FDI) flows for 2013, then the top 3 countries were all Western European.

The fact that Luxembourg and the Netherlands were two of the three, (possibly in part for tax reasons, but more on that shortly), is beside the point – Europe is still the key destination with each of these top three having more investment than Canada, more than anywhere in South America, and a lot more than China or India. Previous years are much the same.

But at the same time, the data also implies a weakening of Europe’s position. Of the 28 EU countries, 22 have interpretable data. Of those 22, seven saw their investment in the U.S. fall from 2012 to 2013.

Or, if we look at 2009 data when investment  took a global hit, seven countries had not even increased from that level by 2013. It’s also not the same seven, to the extent that 13 of the 22 reported countries seem to have become less attractive to the U.S. company.

Despite year-on-year increases (even through the downturn) of global FDI from the U.S., all this suggests that at least parts of Europe are struggling to remain on the site selectors’ radar.

So why might Europe no longer be top of the list?

There are at least four main reasons that U.S. companies might be reconsidering their location strategies:

  • Probably the obvious point is the ongoing problems of the Eurozone members. Eight countries have received at least one bailout since 2008, including one of the darlings of U.S. investment, Ireland. At the same time, the simmering tension in some of the wealthiest countries to embrace the Euro, and indeed the EU, is hardly an advert for investment. If the UK and France are not clearly pro Europe, why should an American firm be?
  • Some of the largest U.S. companies are incorporated in European countries that help to ensure tax efficiency: manufacturer Fiat Chrysler in Luxembourg, plus the tech examples of Apple in Ireland, Starbucks in the Netherlands and Amazon in Luxembourg are all well known. Whatever your view on the rights and wrongs of the approach, the legal cases being developed against them by the European Commission will leave these companies questioning the scale of their European presence, and whether the region remains truly open for business.
  • Similar to the above, are companies like Uber. Less about tax, and more about protecting existing established industries, there isn’t much of Europe left that hasn’t seen some form of workers protest against the impact of Uber. Again, the arguments for and against are not really the issue here, the underlying point is that innovative American companies - be it manufacturers of otherwise - may start to think twice about investing in a Europe that demonstrates conservatism.
  • Alongside the challenges in Europe, the bar is also being raised: locations outside of Europe are becoming more competitive, hence the number of truly viable countries be it in Asia or Latin America have increased. Furthermore the Bring Jobs Home Act and Make it in America plan are initiatives that encourage American companies to think twice about a Europe that may not be fully embracing their investment anyway.

So, do these arguments mean that U.S. companies should think twice about European site selection? The answer to this should still be a ‘no’. It’s inescapable that more competition means Europe is just one option, but nevertheless it does remain the leading option. This is because irrespective of the negatives that currently abound, Europe’s strengths are still evident.

Why Europe? (or why not somewhere else?)

Europe is a mature set of markets that continue to offer significant business opportunities for the American company – for all the complication, the examples of Uber and Fiat Chrysler actually illustrate the success that can be achieved.

Even though European Commission policy might be viewed as protectionist, U.S. companies can and do exploit these laws the same as a European company. In this sense then, while Europe is a different playing field, it’s still a level one.

In addition, for a U.S. company starting out overseas, the examples of the behemoths cited in this article are less relevant anyway as examples of the European environment for U.S. companies. Indeed Economic Development Organizations throughout Europe continue to embrace and help nurture US investment.

Moreover, Europe’s overall long term investor attractiveness will continue because:

  • The language and cultural links (particularly to the UK and Ireland) will remain
  • Other world regions still bring their share of political, economic, and security risks
  • Despite the conservatism alluded to above, innovation is still prominent – there are now 40 European ‘unicorns’ – i.e. tech start-up companies with an equity valuation of over $1 billion, but also successful start-up manufacturers, such as Fairphone.  Hence it’s a market that American firms should still want to be part of.
  • Tax efficiency is still possible – for example Endo International, the pharmaceuticals manufacturer that has reincorporated as an Ireland-headquartered company through acquisition, thus reducing its corporate tax burden from 28% to 20%

So what next for international site selection?

It’s never been a case of “Europe or nothing”, but nonetheless it is still the first option for more American companies than anywhere else. So, while Europe’s economic and political situation is particularly difficult for now, such challenges are cyclical. Plus whenever the Transatlantic Trade and Investment Partnership is signed, this should boost European attractiveness further. So yes, despite everything, Europe is still likely to be the first port of call.

Joe Phillips is managing director of All Out Location, an economic development consulting company  specializing in Foreign Direct Investment and export promotion. In the private sector, the company provides site selection services.

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