The Case for
Investing in Europe
Why U.S. firms should stay the course
Joseph P. Quinlan
Preface and Acknowledgements
This study takes a long and extended view of Europe,
and concludes that the case for investing in Europe
remains as compelling today as it has been for the past
half century. The future will be no different.
Europe—notwithstanding current financial challenges
and economic woes—will remain one of the largest
and wealthiest economic entities in the world for
the foreseeable future. Accordingly, U.S. firms that
require global scope, external resources and overseas
markets for growth can ill afford to ignore Europe’s
wealthy consumer base, skilled labor capabilities, and
technological and innovative clusters. U.S. firms absent
in Europe are ignoring a combined market economy
larger than the United States.
And that is not all. As highlighted in the following pages,
Europe’s extended periphery—which includes Russia in
the North, Turkey to the east, the Middle East and North
Africa to the south and west—represents one of the
most dynamic areas of the global economy. U.S. firms
“inside” the European Union enjoy preferential access/
proximity to this vibrant part of the world.
In addition, U.S. foreign affiliates in Europe are crucial
to the long term success of their parent companies and
to the overall health of the U.S. economy. The more
profitable U.S. affiliates are in Europe, the greater the
amount of earnings available to U.S. parents to hire and
invest at home, dole out higher wages to U.S. workers,
and/or increase dividends to U.S. shareholders.
I would like to thank AmChams in Europe, the network
of 44 American Chambers of Commerce across Europe
for spearheading this project and for their input and
insight in putting together this report. Many thanks also
to the U.S. Chamber of Commerce for their support.
Special thanks to James Medaglio.
The views expressed here are my own, and do not
necessarily represent those of the AmChams in
Europe.
Joseph Quinlan
Transatlantic Fellow at the Center for Transatlantic
Relations, Johns Hopkins, and the German Marshall
Fund, Washington, DC.
Quinlan, Joseph P.,
The Case for Investing in Europe: Why U.S firms should stay the course
New York: 2012
© Quinlan, Joseph, P.
AmChams in Europe (European Council of American Chambers of Commerce)
c/o AmCham EU
Avenue des Arts 53
B-1000 Brussels
Belgium
T (32 2) 289 10 14
E [email protected]
www.amchamsineurope.com
ISBN 978-2-9146856-2-7
2
The Case for Investing in Europe
The Case for Investing in Europe: Executive Summary
There is life after debt
• Despite a decade of difficulties, the transatlantic partnership
has only grown stronger not weaker, larger rather than
smaller, more connected than unconnected.
• No commercial entity in the world is as large as the one
binding the United States and Europe together; the
transatlantic economy still accounts for over 50% of world
GDP in nominal U.S dollars and 41% on a purchasing
power parity basis.
• Today, the risks and challenges before Europe are
formidable. However, as other crises have shown, there is
life after debt and a financial crisis. Europe will prove to be
no exception.
• This crisis will pass. Real growth will resume. Companies
will hire and consumers will spend again. The crisisstricken nations of the past—like Sweden (1994), Indonesia
(1997), Brazil (1998)—are among the strongest in the world
today. The negative headlines of today do not portend the
future.
Why Europe still matters
• Because Europe is quite large, wealthy, richly endowed,
open for business, and ripe for labor and public sector
reform, the region will remain a critical geographic cohort
in the global operations of U.S. companies.
• U.S. firms not invested in Europe are ignoring a combined
market economy larger than the United States. By either
measurement of output—GDP expressed in nominal US
dollars or on a purchasing power parity (PPP) basis—
Europe’s economy is expected to remain larger than
America’s for the foreseeable future.
• It is Europe’s size and wealth that sets the region apart.
In 2010, Europe accounted for roughly 30% of global
personal consumption expenditures, a share greater than
the United States (27.7%) and a share more than double
the BRIC’s combined (just 13.6%).
• Many European economies remain among the most
competitive in the world. In the latest rankings of global
competitiveness from the World Economic Forum, seven
European countries were ranked among the top 10, and
five more among the top twenty-five.
• Based on the Innovation Union Scoreboard for 2011,
Switzerland, Denmark, Sweden, Finland and Germany
rank as innovation leaders in Europe. European-based
companies accounted for roughly 25% of total global R&D
in 2010 and 2011, a share well ahead of R&D spending in
Japan (11.4%), China (13.1%), and India (2.8%).
• Europe leads the world in producing science and
engineering graduates, with the EU, accounting for 18% of
global natural science graduates in 2008. America’s share
was 10% of the total. The EU’s share of global engineering
degrees (17%) was even more impressive relative to
America’s (4%).
The China next door
• EU enlargement has been hugely beneficial to U.S. firms
embedded in the European Union; the process has given
U.S. firms access to new consumers and to a relatively
large pool of skilled/low-cost labor.
• Personal consumption in Eastern Europe doubled between
1990 and 2005 and then nearly doubled again by 2010.
Today, personal consumption expenditures in developing
Europe (Russia included) exceed consumption levels in
China.
• Europe’s periphery encompasses Central and Eastern
Europe, including Russia; the Middle East, Turkey and
Africa, notably North Africa.
• The total output of Europe’s periphery is larger than China’s
total output. In 2010, the periphery nations produced $11.6
trillion in output versus China’s $10.1 trillion (numbers are
based on PPP).
• In the aggregate, Europe’s periphery consumed a
staggering $2.3 trillion in goods imports in 2010—that is
over 60% larger than total imports of China and a figure
larger than the world’s top importer of goods, the United
States. The European Union—and U.S. firms inside the
EU—are the largest suppliers of goods and services to the
extended periphery.
Prosperity in Europe = Prosperity in the United States
• U.S. foreign affiliates in Europe are crucial to the long-term
success of their parent companies and to the overall health
of the U.S. economy.
• U.S. foreign affiliates serve as a complement, not substitute,
to activities in the United States. U.S. affiliates in Europe
help create trade, not destroy it. Affiliates are dependent
on the parent for capital goods, parts/components, etc.
This interdependence drives related-party trade.
• Roughly 30% of U.S. exports to the European Union in
2010 represented related-party trade, but the percentage
is higher for some countries like the Netherlands in 2010
(48%).
• The more profitable U.S. affiliates are in Europe, the greater
the amount of earnings available to the parent firm to hire
and invest at home, dole out higher wages to U.S. workers,
and/or increase dividends to U.S. shareholders.
The way forward
• In the end, notwithstanding Europe’s cyclical weakness,
the region’s fundamentals and underlying attributes
remain solid. The case for investing in Europe—and the
justification for U.S. companies staying the course—
remains very much intact.
• According to the World Bank, 12 European economies
ranked in the top 25 most business-friendly nations in the
2012 survey.
The Case for Investing in Europe
3
Chapter 1
There is life after debt
The current state of the
transatlantic economy
America’s strategic pivot to Asia, coupled with daily
prophesying from pundits that the future of the
world economy lies with the “rest” or the emerging
economies, notably China, suggests that Europe
is becoming less and less relevant to the global
success of corporate America.
Nothing, however, could be further from the truth.
Yes, it has been a rocky decade for the transatlantic
economy, defined here as the highly integrated
economic space inhabited by the United States
and Europe. In the past ten years the transatlantic
partnership has been buffeted by economic
recessions, military conflicts in the Middle East, a
U.S.-led financial crisis-cum-global recession, and
now Europe’s sovereign debt crisis.
Despite all of the above, though, the transatlantic
partnership has only grown stronger not weaker,
larger rather than smaller, more connected than
unconnected.
No commercial entity in the world is as large as the
one binding the United States and Europe together.
Despite the uber commentary on the “rise of the
rest”, the transatlantic economy still accounts for
over 50% of world GDP in nominal U.S. dollars,
and 41% on a purchasing power parity basis.
Europe—notwithstanding an avalanche of negative
commentary—remains one of the largest economic
entities in the world, representing nearly 22% of world
output in 2010. China’s global share of world output
stands at 14%, well below Europe’s.
Many metrics highlight the primacy of the transatlantic
economy—it is the United States and Europe that
account for roughly one-quarter of world exports and
around one-third of world imports. In terms of foreign
direct investment—the glue that binds the global
economy together—the U.S. and Europe account
for nearly 60% of total inward stock of foreign direct
investment and almost 75% of the outward stock of
foreign direct investment. This is another way of saying
that it has been the U.S. and Europe at the forefront in
stitching the global economy together, with each party
being the other’s largest foreign investor.
Early in the 21st century, the global economy rests on
the shoulders of the transatlantic partnership.
Still Number
The Transatlantic
Economy vs.
The Restvs.
of The
Still One:
number
one: The transatlantic
economy
the World
rest of the world
(% of global total, GDP based on purchasing-power-parity)
(% of global total, GDP based on purchasing-power-parity)
7.5%
9.3%
8.6%
40.8%
40.8%
Transatlantic
28.0%
Developing Asia
5.8%
Japan
8.6%
Western Hemisphere
9.3%
Other
7.5%
Middle East/Africa
5.8%
28.0%
Data for 2010
Source: International Monetary Fund
The Case for Investing in Europe
5
Of America’s overseas stock of foreign direct
investment in 2010, over half of the total (56%) was
sunk in Europe. Meanwhile, European firms accounted
for nearly three-fourths of total foreign direct investment
in the United States in the same year.
All told, some $5 trillion in commerce takes place
between U.S. and European firms and their affiliates
each year.i
between 2000 and 2010. On the back of this surge
in investment, the output of U.S. foreign affiliates in
Europe nearly doubled in the decade to 2010, and
totaled an estimated $625 billion in 2010. To put the
latter number into perspective, U.S. foreign affiliate
output in Europe was greater than the total output of
such medium-sized economies in Europe like Poland,
Belgium and Sweden.
Notwithstanding the ascent of China, robust growth in
Brazil, structural reforms in India, and the overarching
potency of the emerging markets, the commercial ties
of the United States and Europe have thickened over
the past ten years.
Not surprisingly, the jump in U.S. affiliate output
entailed a corresponding rise in affiliate employment
and sales. Both metrics have increased over the past
decade, with U.S. affiliate employment in Europe
rising from 3.7 million workers in 2000 to 4.3 million
in 2010. U.S. foreign affiliate sales, meanwhile, totaled
an estimated $2.7 trillion in 2010, more than double
the level of 2000 ($1.3 trillion).
To this point, the stock of U.S. foreign direct
investment in Europe jumped more than three-fold
Reflecting the deep integration of the transatlantic
economy, U.S. foreign affiliate sales in Europe in 2010
A Decade of Deep Integration
The
USTransatlantic
and Europe:
More, not
less,
over the past decade The
Economy:
More,
Notintegration
Less, Integration
(Billions of $)
2000
(Billions of $)
2010*
3,000
2,500
2,000
1,500
1,000
500
0
FDI Stock
Foreign Affiliate
Sales
Source: Bureau of Economic Analysis.
*Estimates for Sales and Output
(goods and services) were some five-times larger than
U.S. exports of goods and services. Nothing better
highlights the thick commercial web that binds the
U.S. and Europe together. Foreign investment and
foreign affiliate sales are a deeper form of integration
relative to trade, which is a more shallow form of
engagement.
Finally, more U.S. foreign investment in Europe has
not only triggered a rise in affiliate output, a jump in
employment, and a surge in affiliate sales. It has also
significantly bolstered the bottom line of corporate
America. No other region on the planet generates
as much profit for corporate America as Europe.
U.S. affiliate income—a proxy for global earnings—
soared more than three-fold between 2000 and
2010 in Europe. Affiliate income hit a record high in
6
The Case for Investing in Europe
Total U.S. Trade
Affiliate Output
Data as of March 2012
2011—touching nearly $209 billion, a near four-fold
increase from a decade ago. Record profits were
achieved even in the face of the turbulent times in
Europe over the past year.
U.S. affiliate earnings and sales are cyclical in nature
and ebb and flow with the European business cycle.
In 2009, for instance, the European sales of S&P 500
companies plunged 24% from the prior year to $516
billion, but then rebounded 29% in 2010 to $666 billion.
That said, affiliate income will most likely soften in
Europe over the near-term. However, the secular trend
is upward; given its size, wealth, and other favorable
attributes, Europe will long remain among the most
important regions in the world for U.S. corporate
profits.
It pays to play in Europe–US affiliate income in Europe (Billions of $)
It Pays to Play in Europe - U.S. Foreign Affiliate Income
(Billions of $)
250
209
197
200
199
176
178
154
150
136
114
100
50
86
33
28 22
27
91
93
31
41
44
95
96
48
51
97
98
58
66
54
65
0
90
92
Data through 2011
94
99
00
01
02
03
04
05
06
07
08
09
10
11
Source: Bureau of Economic Analysis
There is life after debt
Europe’s sovereign debt crisis—resulting in widening
credit spreads, dwindling consumer confidence,
falling investment levels—has pushed Europe into
recession. The International Monetary Fund (IMF)
expects EU output to marginally contract this year
while the U.S. economy expands by an estimated
2-3% clip. That is the bad news.
The good news—while Europe’s unfolding recession
has been well covered by the media, less attention
has been paid to the fact that:
• Real growth in the EU should resume next year,
underpinned by the low cost of capital, a rebound
in consumer and business confidence, and strong
external demand;
• Not all economies in Europe are created equal—
some are more competitively positioned, more
financially sound, and more prudently managed than
others. The upshot—a mixed European economic
outlook, with the low debt, highly competitive
economies of the north outperforming the debtladen, uncompetitive economies of the south. This
two-tiered performance will keep aggregate EU
output from contracting dramatically this year;
The popular narrative has missed these points, which
is understandable in that it is highly fashionable to be
negative on Europe. And why not? The indebtedness
of some nations—Greece and Portugal—appears
unsustainable, bringing into question the long-term
viability of the monetary union. What’s more, Europe’s
incoherent and chaotic handling of the crisis over the
past three years has done nothing to improve Brand
Europe.
Yet, as in previous crises over the past decades, this
crisis will pass. Real growth will resume. Companies
will hire again. Consumers will spend again. Economies
will restructure and reset. New winners and losers
will emerge. To this point, the crisis-stricken nations
of the past—like Sweden (1994), Indonesia (1997),
Brazil (1998)—are among the strongest in the world
today. It was not that long ago that Germany was
considered the “sick man of Europe,” although the
nation now ranks among the strongest in the world
after undertaking painful reform measures. In other
words, the negative headlines of today regarding
the European debt crisis hardly portend or divine the
future.
Today, the risks and challenges before European
politicians and policy makers are formidable. As other
crises have shown, however, there is life after debt.
Europe will prove to be no exception.
• The crisis itself has triggered EU-wide structural
reforms that will make Europe stronger, not weaker
in the long-term.
The Case for Investing in Europe
7
Chapter 2
Why Europe still matters
Europe, the weak link of the global economy at
the moment, remains a formidable economic entity.
While the crisis has battered the global brand of
Europe, the region remains quite large, wealthy,
richly endowed, open for business and ripe for
reform when it comes to service activities.
The region is also likely—in time—to emerge
stronger, not weaker, from the sovereign debt crisis.
Due to all of the above, Europe will remain a critical
and indispensible geographic cohort in the global
operations of U.S. companies. Remember: U.S.
multinationals increasingly view the world through a
tri-polar lens—a world encompassing the Americas,
Europe and Asia, along with attendant offshoots. In
this tri-polar world, U.S. companies are not about to
give up on or decamp from one of the largest segments
of the global economy.
Number 1: Europe is too big to ignore
U.S. firms not operating in Europe are missing out on
one of the largest markets in the world.
By either measurement of output—GDP expressed
in nominal US dollars or on a purchasing power
parity (PPP) basis—Europe’s economy is expected
to remain larger than America’s for the foreseeable
future. In 2010, Europe accounted for 27.3% of world
GDP based in nominal US dollars, while its share of
world GDP based on a PPP basis was 21.2%. Both
figures are larger than America’s global share of
world output—23.1% in U.S. dollars and 19.5% on
purchasing power parity basis.
Many U.S. multinationals embedded in Europe today
have persevered and stayed the course through world
wars, the Great Depression, currency and oil shocks,
and numerous bouts of transatlantic political tensions.
Successful U.S. firms are accustomed to adapting to
short- and medium-term market conditions in Europe
and have dealt with these fluctuating conditions in
recognition of Europe’s long-term strategic importance
to the bottom line of corporate America.
Europe matters. The case for doing business in the
region rests on the following facts:
U.S. firms not present in Europe are ignoring a
combined market economy larger than the United
States. What started out as a loosely configured market
of six nations (Belgium, France, West Germany, Italy,
Luxembourg, and the Netherlands) in the late 1950s
is now an economic behemoth of 27 member states,
with more countries waiting to join.
What’s more, five years from now, according to
estimates from the IMF, Europe’s share of world
output is still expected to be larger than the United
States, 18.4% for the former, 17.6% for the latter.
And notwithstanding all the chatter about the rise of
China and the emerging power of the BRICs, Europe
will remain one of the largest economic entities in the
world over the balance of this decade.
The Case for Investing in Europe
9
Europe’s economy to remain larger than America’s
(% of global total, GDP based on purchasing-power-parity)
Europe's Economy to Remain Larger than America's
(% of global total, GDP based on purchasing-power-parity)
U.S.
Europe*
35
33
31
29
27
25
23
21
19
17
15
1980
1990
*Europe = EU27 Countries + Norway + Switzerland + Iceland
**International Monetary Fund Estimates
2000
2010
2016**
Source: International Monetary Fund
Number 2: Europe is too wealthy to pass up
poor, with a per capita income totaling just $7,536 in
2010 according to the World Bank. The figure ranks
95th in the world and is well below the per capita
income levels of the Netherlands ($42,475), Ireland
($39,727), Sweden ($38,947), Germany ($37,591), and
the European Union average of $31,676 in 2010. With
a miserly per capita income of $3,582, India ranks
124th.
Not only is Europe among the largest economic entities
in the world, it is also among the wealthiest.
It is Europe’s size and wealth that sets the region apart
from many other parts of the world, the United States
included.
In 2010, Europe accounted for roughly 30% of global
personal consumption expenditures, a share greater
than the United States (27.7%) and a share more than
double that of the BRIC’s (just 13.6%). Gaining access
to wealthy consumers is among the primary reasons
why U.S. companies venture overseas, hence the
continued attraction of Europe to U.S. firms.
The equation that excites multinationals about Europe
is the following: Economic size + per capita wealth
= solid and stellar profit potential.
Europe is one of the largest and wealthiest markets
in the world—too big and wealthy for U.S. firms to
ignore. And too open, as well. As a recent World
Bank study notes, trade openness among the EU27
is higher than in other parts of the world,
Asia included.i
While much has been made of the rise of China, with
the mainland’s economy now the second largest in
the world, the Middle Kingdom remains relatively
The European consumer is mightier than the U.S. consumer
(Household comsumption expenditures, Trillions of $)
The European Consumer is Mightier than the U.S. Consumer
(Household comsumption expenditures, Trillions of $)
U.S.
Europe*
13
12
11
10
9
8
7
6
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
*Europe = EU27 plus Norway, Switzerland, Iceland, Albania, Bosnia and Herzegovina, Croatia,
Macedonia, Montenegro, Serbia, Turkey, Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia, and Ukraine.
2009
2010
Source: United Nations
The Case for Investing in Europe
11
Number 3: Europe
ingredients for growth
possesses
the
right
Europe’s sovereign debt crisis has obscured a critical
fact about the region’s global competitiveness:
notwithstanding current market problems, many
European economies remain among the most
competitive in the world. For instance, in the latest
rankings of global competitiveness from the World
Economic Forum, seven European countries were
ranked among the top 10, and five more among the
top twenty-five. Switzerland ranked first, Sweden
ranked 3rd, Finland 4th, Germany 6th, the Netherlands
7th, Denmark 8th, the United Kingdom 10th, Belgium
15th, Norway 16th, France 18th, Austria 19th, and
Luxembourg 23rd.
The United States, by way of comparison, ranked 5th.
At the other end of the spectrum, a handful of
European nations scored poorly, underscoring the fact
that Europe’s competitiveness is hardly homogenous.
Seven nations did not even score in the top fifty, with
Greece ranked 90th in the latest survey, the worst
performer among EU members.
The spread between Number One Switzerland
and floundering Greece underscores the divergent
competitiveness of the EU and highlights the fact that
various nations exhibit various competitive strengths
and weaknesses. For instance, Greece received low
marks for its public institutions and inefficient labor
markets, which stands in contrast to Ireland’s well
functioning labor force or Norway’s highly ranked
public institutions.
Top 30 rankings in the Global Competitiveness Index 2011-2012
Economy
Rank
Score
Switzerland
1
5.74
Singapore
2
5.63
Sweden
3
5.61
Finland
4
5.47
United States
5
5.43
Germany
6
5.41
Netherlands
7
5.41
Denmark
8
5.40
Japan
9
5.40
United Kingdom
10
5.39
Hong Kong
11
5.36
Canada
12
5.33
Taiwan
13
5.26
Qatar
14
5.24
Belgium
15
5.20
Norway
16
5.18
Saudi Arabia
17
5.17
France
18
5.14
Austria
19
5.14
Australia
20
5.11
Malaysia
21
5.08
Israel
22
5.07
Luxembourg
23
5.03
Korea, Rep.
24
5.02
New Zealand
25
4.93
China
26
4.90
United Arab Emirates
27
4.89
Brunei Darussalam
28
4.78
Ireland
29
4.77
Iceland
30
4.75
Data as of March 2012
12
The Case for Investing in Europe
Source: World Economic Forum:
Global Competitiveness Report 2011-2012
Belgium was cited for outstanding health indicators
and primary education. France was highlighted for
its transport links and energy infrastructure, quality
of education, sophisticated business culture, highly
developed financial markets, and leadership in
innovation. Estonia, Poland and the Czech Republic
were cited for their top notched education systems
and flexible labor markets; Spain’s ranking was hurt by
macroeconomic imbalances but scored relatively well
in terms of ICT usage. Italy’s labor force remains quite
rigid but the nation scored well in terms of producing
goods high in the value chain. Finally, Germany ranked
highly across many variables: quality of infrastructure,
efficient goods market, R&D spending, exports and
largest domestic market, among other things.
In terms of innovation and sophistication factors, the
U.S. ranked 6th overall, lagging behind Sweden (1st),
Switzerland (2nd), Finland (4th) and Germany (5th).
Moreover, although the overall U.S. ranking was quite
high, the United States lagged behind many European
nations when it came to infrastructure, health
and primary education and technology readiness.
Amazingly, the U.S. ranked one notch lower on
technology readiness than Portugal.
While significant discrepancies exist among nations
in the EU as to knowledge-based capabilities, the
innovation performance of the EU remains ahead of
Australia, Canada and all BRIC nations. In addition,
based on the latest figures, the EU is closing its
performance gap with Japan and the United States.
All of the above is another way of saying that there
is a great deal more to Europe than the daily diet of
negative headlines. The various nations of Europe
offer specific micro capabilities/competencies that
are critical to the global success of U.S. firms.
One of these specific attributes lies with Europe’s
innovation and knowledge-based activities. Based
on the Innovation Union Scoreboard for 2011,
Switzerland, Denmark, Sweden, Finland and
Germany rank as innovation leaders in Europe.
Europe leads the way: Number of first university degrees (engineering)
(% of global total)
Europe Leads The Way: Number of First University Degrees (Engineering)
(% of global total)
4.0%
4.0%
US
17.0%
EU
5.0%
Japan
34.0%
China
17.0%
Asia-8*
7.0%
Russia
2.0%
Brazil
14.0%
All Others
14.0%
2.0%
17.0%
7.0%
5.0%
17.0%
34.0%
*Asia-8: India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand
Source: Organisation for Economic Co-operation and Development: Science and Engineering Indicators, 2012
The Case for Investing in Europe
13
In that R&D expenditures are a key driver of valueadded growth, it is interesting to note that Europeanbased companies accounted for roughly 25% of total
global R&D in 2010 and 2011. That lagged behind the
share of the United States (32% in 2011) but was well
ahead of the global share of R&D spending in Japan
(11.4%), China (13.1%), and India (2.8%).ii In 2011,
Germany, Sweden, Switzerland, and Finland spent
more on R&D as a percentage of GDP than the United
States.
Led by European industry leaders like Roche,
GlaxoSmithKline, Bayer, Novartis and AstraZenca,
Europe remains a leader in life science research
and development. Looking at R&D leaders in
other sectors, Germany is at the forefront in R&D
in agriculture and food production, automotives,
aerospace, nanotechnology, energy, and information
and communications. The United Kingdom is an R&D
leader in military aerospace, nanotechnology, energy
and environmental and sustainability. France ranks
highly in R&D in commercial and military aerospace.iii
Innovation requires talent and on this basis Europe
is holding its own relative to other parts of the world.
To this point, Europe leads the world in producing
science and engineering graduates. According to the
latest data from the National Science Board, the EU
accounted for 18% of global natural science graduates
in 2008. America’s share was 10% of the total. The
EU’s share of global engineering degrees (17%) was
even more impressive relative to America’s, with
the latter accounting for just 4% of global
engineering degree.
According to National Science Board, of the world’s
global research pool, the EU housed 1.5 million
researchers in 2008 versus 1.4 million in the United
States. The EU accounted for 25% of the global total.
In specific industries, the EU remains notably strong
in such high-technology manufacturing industries
as pharmaceuticals and scientific instruments and
aerospace. Against this backdrop, the EU is the
largest exporter of commercial knowledge-intensive
services (excluding intra-EU exports), accounting for
about 30% of the world total in 2010. The U.S. share
was 22%.
Finally, in terms of future workers, the U.S. high school
graduation rate lags behind most European nations;
indeed, the US ranked 18th out of 25 OECD nations
for graduation rates in 2008, trailing behind EU states
such as Germany, Ireland, Finland, Greece, Norway,
the UK, Switzerland, Iceland, Czech Republic, Italy,
Denmark, Poland, Slovakia and Hungary.
While U.S. universities remain a top destination for
foreign students, the UK, Germany and France also
draw students from other countries.
In the end, Europe remains among the most
competitive regions in the world in terms of science
and technology capabilities. According to the U.S.
National Science Board, “EU research performance
is strong and marked by pronounced EU-supported,
intra-EU collaboration.” iv
Technology/innovation comparisons: Europe vs. the U.S.
(relative technological advantage indices by sector, ratio, 2007)
Europe
United States
Aerospace and defense
1.50
1.13
Automobiles and parts
1.26
0.58
Biotechnology
0.32
2.20
Chemicals
1.31
0.64
Commercial vehicles and trucks
1.30
1.06
Computer hardware and services
0.08
1.39
Electrical components and equipment
1.56
0.18
Electronic equipment and electronic office equipment
0.18
0.37
Fixed and mobile telecommunications
1.53
0.20
Food, beverages, and tobacco
0.92
0.74
General industrials
0.61
1.49
Health care equipment and services
0.70
1.86
Household goods
0.84
1.60
Industrial machinery
1.84
0.24
Industrial metals
1.00
0.30
Internet
0.00
2.54
Oil
1.00
0.85
Personal goods
1.44
0.69
Pharmaceuticals
1.27
1.16
Semiconductors
0.50
1.72
Software
0.51
2.05
Support services
0.78
1.19
Telecommunications equipment
1.38
1.09
Data as of January 2012
Source: World Bank: Golden Growth:
Restoring the Lustre of the European Economic Model
Number 4: Making it happen — the ease
of doing business in Europe
The rate by which a particular economy grows and
expands certainly matters to U.S. multinationals
and hence the attraction towards the super-charged
economies of China, Brazil, and India.
Yet micro factors matter as well. Country and industry
regulations can help or hamper the foreign activities of
U.S. multinationals, and greatly influence where U.S.
companies invest overseas. Think property rights,
the ability to obtain credit, regulations governing
employment, the time it takes to start a business,
contract enforcements, and rules and regulations
concerning cross border trade. These and other
metrics influence and dictate the ease of doing
business, and on this basis many European countries
rank as the most attractive in the world.
The World Bank annually ranks the regulatory
environment for domestic firms in 183 nations, a
ranking which serves as a very good proxy for the
ease of doing business for domestic and foreign
companies alike. In the most current 2012 rankings,
12 European economies ranked in the top 25
most business-friendly nations. Denmark ranked
5th overall, followed by Norway (6th), the United
Kingdom (7th), Iceland (9th), Ireland (10th), Finland
(11th), Sweden (14th), Georgia (16th), Germany (19th),
Latvia (21st), Macedonia (22nd), and Estonia (24th).
Out of the top 50 rankings, European firms made up
nearly half, with 24 nations placed in the top fifty.
Outliers include Greece, ranked 100th, and Serbia,
ranked 92nd and Italy (87th).
Reflecting the
challenging business environment of many key
emerging markets, China ranked 91st in terms of
ease of doing business in 2012, while Russia ranked
120th. Brazil and India were even further behind,
ranked 126th and 132nd respectively.
The Case for Investing in Europe
15
The nations just mentioned are regularly hyped as
among the most dynamic in the world, yet strong real
GDP growth does not necessarily equate to a favorable
environment for business. Other considerations
need to be factored into the equation; like the rise
of state capitalism in many developing nations,
continued intellectual property right infringements,
and domestic policies that discriminate against
foreign firms. These factors have become favorite
policy tools in many key emerging markets, further
enhancing the attractiveness of Europe in the eyes of
U.S. multinationals.
In the end, the greater the ease of doing business in
a country, the greater the attractiveness of that nation
to U.S. firms. The micro climate matters just as much
as the macro performance; Europe trumps many
developing nations by this standard.
Ease of doing business rankings: Top 25
Economy
Rank
Singapore
1
Hong Kong SAR, China
2
New Zealand
3
United States
4
Denmark
5
Norway
6
United Kingdom
7
Korea, Rep.
8
Iceland
9
Ireland
10
Finland
11
Saudi Arabia
12
Canada
13
Sweden
14
Australia
15
Georgia
16
Thailand
17
Malaysia
18
Germany
19
Japan
20
Latvia
21
Macedonia, FYR
22
Mauritius
23
Estonia
24
Taiwan, China
25
Data as of March 2012
Source: World Bank: Doing Business Report 2012
16
The Case for Investing in Europe
Number 5: Services: the sleeping giant of
Europe presents huge opportunities for U.S.
companies
Services remain the great unexploited market in
Europe; a sleeping giant that if unshackled could
bestow tremendous cost benefits and profits on U.S.
firms with pan-European operations.
Presently, national regulations are in need of greater
harmonization, a process that would help remove
significant barriers to entry for external firms. Many
service standards or service professions in one nation
are not recognized by another nation, a situation that
keeps markets closed, incomplete and less integrated.
It also results in higher costs for consumers and
businesses. The cost of broadband services, for
instance, differs tremendously across the continent
thanks to different regulatory regimes.
As the World Bank notes, for many services:
“…regulatory barriers prevent the benefits of trade
and integration from being fully realized. Digital
services, such as Internet sales and IT support, are
far less developed in Europe. For example, the United
States accounts for around 80 percent of global
e-book sales, but Europe for only 10 percent, mostly
in the United Kingdom. The online music storage and
sharing service Spotify is available in only 7 European
countries and iTunes is accessible in only 15 states.
National regulations make it difficult for companies to
operate Europe-wide, preventing efficiency and cost
gains from being realized. After years of negotiations,
Europe still does not have a single European patent,
which increases the cost of innovators. Telecom
services, biotechnologies, and pharmaceuticals
are nationally regulated, leading to significant price
divergence across Europe and reduced incentives for
business to invest in R&D. In professional services,
the mutual recognition of qualifications remains
incomplete, while contract law and professional
liability and insurance requirements differ and create
risks for cross-border sales, particularly by small and
medium enterprises.”
Against this backdrop, services are among the last
frontiers of Europe. Some estimate that the opening
of services in the single market would add 4% to the
EU’s GDP.
That said, the liberalization of services and the deeper
integration of services across the EU is expected to
gather pace in the future, albeit slowly. Cross border
trade and investment in services has been bolstered
by falling communication and technology costs, and
by the general recognition among policymakers that
Europe’s protected service activities are a key source
of future growth. In 2005 the European Commission
passed the Services Directive with the aim of reducing
or eliminating regulatory barriers to services.
However, the implementation of the Services Directive
for EU states has been slow and uneven in many
sectors to date. Cross border trade, nevertheless,
has increased over the past decade, with service
exports by Europe and developing nations almost
tripling between 1997 and 2007. While the internal
market for services is less integrated than goods,
Europe’s internal trade in services is still the largest
in the world, estimated at $4 trillion by the World
Bank.
E-commerce remains in its infancy, with 3-4% of
Europe’s goods and services sold via the web.
However according to the European Commission,
the proportion of Europeans making online
purchases increased at a double-digit rate between
2004 and 2010. Many expect online shopping
in the EU to expand by double-digits per annum
over the next few years. Recognizing the potential
of e-commerce and its offshoots, the European
Commission earlier this year announced the goal of
creating a “digital single market”, with the aim of
doubling e-commerce retail sales by 2015.
In the end, while the EU lacks a single market in
services, various service activities in Europe are
slowly but surely becoming unshackled and open to
outside forces; the upshot — the next great boom in
transatlantic integration will come in services.
Number 6: Post-crisis Europe — stronger not
weaker.
It was not that long ago that Germany was billed
as the “sick man of Europe,” yet by adopting a
number of politically difficult structural reforms early
last decade, Germany has emerged as the most
powerful economy in Europe. To paraphrase Polish
foreign minister Radoslaw Sikorski, Germany has
become “Europe’s indispensable nation.”
Might both the Eurozone and European Union
follow a similar path of Germany from the crisis—
becoming stronger, not weaker, by accepting painful
yet necessary economic reforms?
Time will only tell. However, the crisis has been a
catalyst for the gradual adoption and pursuit of
measures that will, over time, increase the level
of cooperation and coordination among European
states, strengthen the mechanics of the Growth
and Stability Pact, and nudge Europe ever closer
towards a fiscal union. The infrastructure is being
put in place that will increase the transparency
and accountability of member state’s fiscal and
macroeconomic policies, with the expectation that
future potential crises will be avoided.
In short, albeit slowly and haltingly, the institutions,
mechanisms and policies are being adopted that
will make Europe stronger and more integrated in
the future.
The Case for Investing in Europe
17
Think of it this way: the financial crisis has forced
Europe to rethink and address the design flaws and
shortcomings of the single currency—which there
are many. Europe’s monetary union was adopted
without a corollary economic union, and without a
fiscal union, appropriate government institutions
and mechanisms by which to coordinate economic
policies. And compounding matters, the Stability and
Growth Pact that was intended to impose budget
discipline on member states and promote sound
public finances was rendered less effective when
France and Germany, confronting widening deficits,
watered down many of the rules and regulations of
the Pact.
Today, however, the facilities that were lacking at the
outset of the monetary union are now being put in
place. This includes an agreement on a permanent EU
crisis fund, a stronger and more proactive European
Central Bank, greater intra-Europe coordination and
enforcement of fiscal policies (the fiscal compact)
and stricter macroeconomic surveillance. Meanwhile,
Europe’s heavily indebted nations are taking painful
steps to rein in spending, boost productivity, increase
labor market flexibility and other structural reforms.
In the long run, these measures, combined with labor
and industry reform at the national level, will ultimately
give Europe a sturdier foundation by which to operate
and grow.
One cannot rule out that after all the drama of the past
two years, the Europe that evolves and emerges from
the crisis will be more politically and economically
integrated, and therefore an even more attractive place
to do business.
i See “Golden Growth: Restoring the luster of the European Economic
Model,” Indermit Gil and Martin Raiser, World Bank
ii See “2012 Global R&D Funding Forecast”, Battelle, December 2011
iii ibid
iv See the National Science Board’s “Science and Engineering Indicators,
2012,” page 0-3
18
The Case for Investing in Europe
Chapter 3
The China next door
Europe’s extended periphery as a
new source of growth for U.S. firms
A critical attraction of Europe is that it is a unique
market hybrid. The European Union, for instance,
is an unusual blend of developed market economies
(the EU-15) and developing markets (the EU-12).
No other place in the world has done a better
job integrating the old and commercially mature
with the new and underdeveloped. When fused,
the two halves offer some of the best commercial
opportunities in the world.
The alchemy of Western and Eastern Europe has been
hugely beneficial to those U.S. firms embedded in
the European Union. EU enlargement has meant not
only the geographic extension of Europe but also the
enlargement of market opportunities, resources and
profits in the east for U.S. multinationals.
According to most recent figures, there are more
Polish manufacturing workers on the payrolls of
U.S. foreign affiliates (roughly 100,000 workers) than
manufacturing workers employed by affiliates in Spain
(98,000), Ireland (56,000) or even Japan (79,000) and
South Korea (58,000) for that matter.
Poland, the Czech Republic, Slovakia and other states
in the region represent new and untapped markets
and a lower wage base which U.S. firms have been
quick to leverage. To the latter point, more than 12%
of corporate America’s European workforce is now
based in the east, up from virtually zero two decades
ago. Affiliate employment in Central and Eastern
Europe expanded at an average annual pace of 8.7%
between 1999-2009 versus a comparable 0.8% rate in
Western Europe.
While EU enlargement has given U.S. firms access to
a relatively large pool of skilled and low-cost labor, it
has also given companies access to new consumers.
Polish workers and others are also consumers,
and consumerism—as measured by personal
consumption expenditures—has simply soared over
the past decade in the east.
Personal consumption in developing Europe — making up for lost time
(Billions of U.S. $)
Making Up For Lost Time: Personal Consumption in Developing Europe
(Billions of U.S. $)
3,000
2,500
2,000
1,500
1,000
500
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
*Developing Europe includes EU-12 plus Albania, Bosnia and Herzegovina, Croatia, Macedonia,
Montenegro, Serbia, Turkey, Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia, and Ukraine.
Source: United Nations
20
The Case for Investing in Europe
06
07
08
09
10
Reflecting many variables—greater employment,
rising incomes, and most of all, pent up demand for
western goods after decades of denial—personal
consumption in Eastern Europe doubled between
1990 and 2005. It then nearly doubled again by 2010,
when expenditures totaled an impressive $2.3 trillion.
That is not bad for a part of the world held under lock
and key and cut off from the global markets during
the Cold War.
More impressive still is this: the consumer in developing
Europe is mightier than the consumer in China. This is
a statement that runs contrary to the common narrative
that China is the largest market in the world for virtually
everything. That may be so, but combined personal
consumption expenditures in developing Europe
(Russia included) exceeded personal consumption
spending in China by 15% in 2010.
Personal consumption in developing Europe vs. China
(Billions of U.S. $)
The China Next Door: Personal Consumption in Developing Europe Versus China
(Billions of U.S. $)
Developing Europe*
China
3,000
2,500
2,000
1,500
1,000
500
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
*Developing Europe includes EU-12 plus Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Source: United Nations
Serbia, Turkey, Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia, and Ukraine.
In the end, consumption is serious business in Central
and Eastern Europe, accounting for nearly 60% of GDP
in 2010. That compares to a figure of 45% in more
trade-dependent Asia and less than 40% in China.
affiliates reported as income in Poland in 2010 $738
million—was well above levels reported in the more
developed markets of Finland, Greece, Italy, Portugal,
and Sweden.
Rising levels of consumer spending, not surprisingly,
has translated into ever-rising sales of U.S. foreign
affiliates. Combined U.S. foreign affiliate sales in
Poland, Hungary and the Czech Republic surged 240%
between 1999 and 2009, rising from $20 billion to $68
billion. The latter figure, incidentally, was two-thirds
larger than affiliate sales in India, home to a population
of 1.2 billion people versus roughly 60 million people in
Poland, the Czech Republic and Hungary. What U.S.
EU enlargement has given European-based U.S.
foreign affiliates preferential market access and
treatment to the east which has been hugely beneficial
and profitable to U.S. multinationals.
That said, Europe’s periphery extends well beyond
Eastern and Central Europe. It is much broader and
more dynamic.
The Case for Investing in Europe
21
Who needs China? Taking stock of Europe’s
extended periphery
Europe’s extended periphery is unmatched on a
global scale. It includes Russia, the Middle East,
Turkey and Africa, notably North Africa. While only
two nations abut the United States, a dozen or so
nations are considered a part of Europe’s immediate
neighborhood.
Granted, Europe’s extended periphery contains many
risks, which are frequently cited and rehearsed in the
media. Less attention has been paid, however, to the
fact that Europe’s extended periphery represents one
of the largest and most dynamic components of the
global economy. And through formal and informal ties,
Europe’s trade, financial and investment linkages with
this part of the world have deepened and thickened
considerably over the past decade to the benefit of
many U.S. firms operating in Europe.
For example, although Turkey remains outside the
European Union, it has not stopped bi-lateral trade
from soaring over the past decade, with total EUTurkey trade expanding 183% between 2000 and
2010. Total trade between Russia soared 479%
over the same period; and trade with Nigeria and
its exploding middle class jumped 379% between
2000 and 2010. European-based U.S. affiliates have
been a part of this surge in bi-lateral commerce,
leveraging Europe as a springboard to the untapped
and undeveloped markets surrounding mainstream
Europe. In most cases, serving these markets from
the United States is too costly; however, the costs and
market opportunities vastly change when U.S. firms
let their European affiliates take the lead. Among other
strategic advantages, this allows U.S. firms to be
closer to their customers and competitors, lends itself
to greater customization and localization by market,
and promotes greater economies of scale.
Europe’s extended periphery is massive in size and
scale. The total output of this geographic cohort is
larger than China’s total output. In 2010, the periphery
nations produced $11.6 trillion in output versus China’s
$10.1 trillion (numbers are based on PPP). Relative to
India, well, it’s not even close, with India’s output just
35% of Europe’s periphery in 2010.
Who needs China and India when you are surrounded
by an economic mass that is larger and just as dynamic
in most cases? China and India may be home to more
people than the periphery but the population of the
latter is a great deal wealthier in most cases.
Output of Europe’s periphery1 vs. China/India (Trillions of $)
Europe’s Periphery
China
India
12
10
8
6
4
2
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
1Europe's Periphery: Developing Europe, Middle East, North Africa and Sub-Saharan Africa
Source: International Monetary Fund
22
The Case for Investing in Europe
05
06
07
08
09
10
Parts of Europe’s periphery are incredibly wealthy
—think of the Middle East and the elevated per capita
incomes of Saudi Arabia, Kuwait, and the United
Arab Emirates. These nations are under populated,
although they punch above their weight when it comes
to consuming western goods and services. On a per
capita basis, the Middle East consumes more goods
than virtually any place on earth. Middle East imports
totaled $767 billion in 2010; an oil-fueled demand for
imports resulted in a 271% increase from the levels
of 2000.
Import demand in Africa has exploded at an even faster
pace over the past decade. The region consumed
roughly $400 billion in imports in 2010, a near fourfold increase from 2000. Thanks to soaring demand
for primary commodities, and, in many cases, sharp
improvements in the terms of trade, real economic
growth of 5-6% or higher is becoming the norm in
Africa. That suggests more consumption, and in fact,
personal consumption expenditures in the Middle
East/North Africa soared from $332 billion in 1995 to
$1 trillion in 2010.
In Sub-Saharan Africa, consumer spending more than
doubled, rising from $178 billion to $535 billion.
In the aggregate, Europe’s periphery consumed a
staggering $2.3 trillion in goods imports in 2010.
That is over 60% larger than total imports of China
and a figure larger than the world’s top importer
of goods, the United States. In various nations of
Europe’s periphery, demand for virtually everything
— automobiles, capital machinery, luxury goods,
consumer electronics, basic materials and other
finished and unfinished goods—has simply soared
over the decade. More importantly, it is expected to
remain relatively robust over the next decade.
Total imports of Europe’s periphery1 vs. China (Billions of $)
Europe’s Periphery
China
3,000
2,500
2,000
1,500
1,000
500
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1Europe's Periphery: Developing Europe, Middle East, North Africa and Sub-Saharan Africa
Source: International Monetary Fund
Who is the top foreign supplier to the Middle East,
Africa and developing Europe — providing goods and
services to the new consuming masses of Morocco,
Jordan, Turkey, Ukraine and Russia?
Answer: the European Union—due in large part to
geography, historical trading ties, modern financial
linkages, and EU policies that have expanded and
created various trade and investment channels with
its periphery (e.g., Europe’s European Neighborhood
Policy program). Of Central and Eastern Europe’s
total imports in 2010, 64% were sourced from the
European Union. Meanwhile, the EU was the top
supplier to the Middle East/North Africa (with a
29% share in 2010), Sub-Saharan Africa (27%) and
to Russia and its partners in the Commonwealth of
Independent States (35%). Of the 144 developing
nations tracked by the IMF, the EU ranked in the top
three suppliers for 109 nations, or 76% of the total.
In contrast, the U.S. share of imports were
considerably lower to Europe’s periphery but the
figures mask the fact that many U.S. multinationals
rely on their European-based affiliates to penetrate
these markets.
The Case for Investing in Europe
23
Developing nations’ key suppliers: The European Union stands out
Central/
Eastern Europe
Middle East and
North Africa
Sub-Saharan
Africa
*CIS
Developing
Asia
Latin
America
EU
64.1%
EU
28.8%
EU
26.6%
EU
34.9%
EU
10.5%
EU
13.5%
U.S.
2.6%
U.S.
7.6%
U.S.
6.0%
U.S.
3.6%
U.S.
7.5%
U.S.
30.8%
Japan
1.1%
Japan
4.1%
Japan
3.2%
Japan
3.1%
Japan
11.1%
Japan
39.0%
Data for 2010
*CIS = Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldolva, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan
Source: International Monetary Fund
U.S. firms “inside” the European Union have been
part of the surge in trade between developed Europe
and its extended periphery.
higher energy and commodity prices have generated
huge surpluses, spurred investment and boosted
public spending.
Looking forward, the outlook in Europe’s periphery
remains relatively constructive. While real economic
growth has slowed this year, Europe’s periphery will
handily expand at a pace much quicker than the
Eurozone. The latter, according to the IMF, is expected
to contract by 0.5% this year, underperforming
expected growth in Central and Eastern Europe
(1.1%), the Commonwealth of Independent States
(3.7%), the Middle East and Africa (3.2%) and SubSaharan Africa (5.5%). In many parts of the periphery,
More important, the current slowdown is cyclical
in nature. Secular forces for growth in Europe’s
periphery remain quite strong and include the build
out of infrastructure, an improvement in the terms of
trade, and above all else, the emergence of a middle
class numbering in the millions. Rising per capita
incomes, the more prominent role of women, rising
employment, higher wages—these and other factors
will trigger another wave of global consumption right
at Europe’s door.
Europe's Periphery to Lead the Way
(Real GDP growth, %)
Europe’s periphery to lead the way
2012
(Real GDP growth, %)
2013
6
5
4
3
2
1
0
-1
Eurozone
Central and Eastern
Europe
CIS*
*CIS = Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic,
Moldolva, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan
Middle East and
North Africa
Sub-Saharan Africa
Source: International Monetary Fund.
In the end, the European Union’s ties with the developing nations—the world’s uncontested new growth
engine—are much deeper and thicker than either America’s or Japan’s. The EU’s extended periphery is the
sleeping giant of the global economy, but one that is finally ready to stir. In the decade ahead, there will be
greater economic convergence between Europe and its periphery, with expanding trade and investment flows,
along with the rising cross border flow of people, capital and ideas facilitating and enabling this convergence.
All of this will transpire to the benefit of Europe and those U.S. firms with European operations.
24
The Case for Investing in Europe
Chapter 4
Prosperity in Europe
means prosperity in the
United States
U.S. firms are increasingly being vilified for
investing overseas and are strongly being
encouraged to “bring the jobs home.” This
nationalist and protectionist tune ignores the fact
that the most cost-effective and competitive means
by which U.S. firms deliver goods and services to
their foreign customers is through foreign direct
investment and foreign affiliate sales.
Exporting is for farmers—not for U.S. multinationals
that compete head-to-head in such highly competitive
markets as Germany, France, the United Kingdom
and Poland. Stiff competition and shifting consumer
demands and preferences mandate a local presence.
Anti-trade and investment policies—if widely
embraced—would
undermine
U.S.
global
competitiveness, stunt growth, impair earnings of
many American firms, promote protectionism among
America’s key commercial partners and ultimately
hurt key U.S. stakeholders, notably U.S. workers and
consumers.
U.S. foreign affiliates in Europe and elsewhere are
crucial to the long-term success of their parent
companies and to the overall health of the U.S.
economy. Affiliates are the global foot soldiers of
corporate America—on the front lines providing goods
and services to foreign customers.
Exporting is one way to deliver goods and services
to European customers. But a number of variables
including intense competition in Europe, ever-shifting
customer dynamics, the primacy of after-sales
26
The Case for Investing in Europe
services and maintenance capabilities and specific
industry requirements dictate that U.S. firms “go local”
or operate “inside” the European Union.
Being “inside” the EU means being inside an
economic entity larger and wealthier, in some cases,
than the United States. As an “insider”, U.S. firms are
better positioned to leverage Europe’s competitive
advantages, which can take the form of hiring life
science graduates in Ireland, conducting R&D
with Swiss scientists in Switzerland, tapping the
university talent of Grenoble, France, or participating
in government-sponsored R&D projects/initiatives
around the region.
Another reason to be “inside” Europe is to avoid costs
associated with various nations import tariffs and nontariff barriers, all of which add to the cost of doing
business and undermine U.S. competitiveness.
In terms of U.S. service providers, the very nature of
their products—whether a financial service firm or a
large-scale retailer—demands that firms operate inside
the European Union. They have no other choice.
U.S. benefits to operating in Europe
For the most part, U.S. foreign affiliates serve as a
complement, not substitute, to activities in the United
States. In particular, while foreign investment and
shifting production overseas are often thought of
as destroying trade—reducing U.S. exports—the
opposite is true.
The common narrative is that a rise in outward
foreign direct investment to Europe invariably leads
to a corresponding decline in exports from the United
States, precipitating a fall in employment, a decline in
income and widening trade deficit. The result: a more
“hollowed-out” economy.
Against this backdrop, and given the integrated
nature of U.S. parents and their European affiliates,
the more sales of U.S. affiliates in Europe, the greater
the need and demand for goods and services from
parent firms, and the higher the level of U.S. exports
to Europe. This dynamic creates export demand for
the United States and greater economies of scale for
U.S. firms, which in turns boosts their productivity
and global competitiveness.
In addition, the more profitable U.S. affiliates are in
Europe, the more earnings available to the parent firm
to hire and invest at home, dole out higher wages
to U.S. workers, and/or increase dividends to U.S.
shareholders.
The reality is different. In many cases, U.S. affiliates
in Europe help create trade, not destroy it. Affiliates
are rarely independent of their U.S. parents but rather
dependent on the parent for various things like capital
goods, intermediate parts and components, special
technology, various services, etc. These needs
manifest themselves in intra-firm trade —or trade that
takes place between the parent and affiliates.
The opposite is true as well. When the European
operations of U.S. firms underperform and fail to
reach their sales and earnings targets, the negative
effect ultimately hits the bottom line of corporate
America. Such is the commercial integration of the
United States and Europe.
A substantial share of transatlantic trade is considered
intra-firm or related-party trade, which is cross border
trade that stays within the domain of the company.
Roughly 30% of U.S. exports to the European Union
in 2010 represented related-party trade, but the
percentage is higher for some countries. For instance,
nearly half of total U.S. exports to the Netherlands in
2010 (48%) were classified as related-party trade.
The more successful U.S. affiliates are in reaching new
consumers in Europe and leveraging the continent’s
resources, the better off the foreign affiliates, the U.S.
parent company, U.S. workers, shareholders, and
local communities.
In the end, it is a win-win proposition.
Investment Leads to More, Not Less, Trade: U.S. Related-Party Exports to Europe
U.S.
exports to Europe
(%related-party
of total)
(% of total)
50
45
40
35
30
25
20
Netherlands
Date for 2010
Belgium
EU
Germany
UK
Source: U.S. Census Bureau
The Case for Investing in Europe
27
Chapter 5
The way forward
Concluding comments
The case for the European Union rests on the
following:
• The Eurozone not only remains intact but will in time
expand to include other member states like Poland;
• The current recession will not be too deep and the
EU economy will rebound by the tail end of this
year, supported by a proactive ECB and monetary
reflation, a weaker euro, solid external demand and
continued economic strength among the northern
states;
• Long-term structural reforms will continue, with
Europe’s sovereign debt crisis a catalyst for public
sector reform, pension reform, labor market reform,
and the deregulation of many service activities;
• The institutional framework of the Eurozone becomes
stronger and more effective in the management of
Eurozone issues; and
• Membership in the European Union expands over
the balance of this decade, as more of Europe’s
periphery formally joins the Union.
All of the above represents the “muddle through”
case and reflects the slow, grinding out process that
comes with a sovereign debt crisis. Just as it takes
time to accumulate a mountain of debt, it takes time
to unwind debt levels well in excess of historic levels.
The scars of a debt-fueled boom and bust are deep
and long-lasting, but as other financial crises have
shown, the wounds eventually heal.
In addition to the above, there is this to contemplate:
• At a time when America’s work force is aging and
shrinking, U.S. firms need even greater access to
Europe’s labor markets, which, unfortunately, are
also in a secular decline. American firms presently
confront a skilled labor shortage, alleviated, to a
degree and for now, by access to Europe’s skilled
labor pool;
• At a time when R&D has gone global, U.S. innovative
leaders are increasingly looking to Europe as
a partner/collaborator for new technology and
innovation, as well as a critical source of R&D
funding;
• At a time when trade and investment protectionism
is gaining traction in many key emerging markets—
think Brazil, India and China—corporate America’s
unfettered access to Europe’s massive market is
even more imperative and important;
• At a time when Europe’s periphery has emerged
as one of the most dynamic components of the
global economy, U.S. firms “inside” Europe are well
positioned to leverage Europe as a spring broad to
these burgeoning markets;
• And at a time when U.S. consumers are still
deleveraging and a long way off from repairing their
household balance sheets, European consumers—
notably in the periphery—have helped offset to a
degree the decline in U.S. demand, supporting the
global sales and profits of U.S. multinationals.
Europe will be no different. It is going to be a tough road
from here. The region is in for some lean years. Future
headlines will speak about more debt restructurings,
imposed austerity, mounting political pressures, and
wealth transfers between rich and poor. The list goes
on. This will be a multi-year process with each pressure
point testing the solidarity of Europe. Yet in the end,
vested interests—inside and outside Europe—will
hold the core and periphery together, as will a general
populace supportive of a united Europe.
To the latter point, despite 2011 being a very difficult
and challenging year for Europe, the region still
accounted for over half—53%—of total U.S. foreign
affiliate income last year, a proxy for global profits.
Even in bad times, in other words, Europe remains a
critical source of profits for corporate America. U.S.
affiliate income in Europe in 2011 was 156% larger
than reported income from Asia—a figure that speaks
volumes about Europe’s underlying importance to
corporate America.
Post-crisis Europe will remain one of the largest and
wealthiest markets in the world for the foreseeable
future. U.S. firms that require global scope, external
resources and growth markets outside the United
States can ill afford to ignore or pass on Europe’s
wealthy consumer base, skilled labor pool, technology
and innovative clusters, and proximity to many
dynamic emerging markets.
The figure also runs counter to the common narrative
of our day. The first such narrative is that Europe
represents the past and is destined to be destitute in
the wake of the sovereign debt crisis, and the second,
that the global economy now beats to the tune of
China, India, Brazil, South Africa and other emerging
markets, with global economic activity shifting from
the west to “the rest.”
The Case for Investing in Europe
29
Reality—at least for U.S. multinationals—is a tad
more nuanced. Headlines that speak to just robust
macroeconomic growth rates in places like Brazil
and India overlook the micro. Doing business on
the ground in these markets is becoming harder, not
easier for many U.S. firms. Brazil, for instance, recently
imposed higher taxes on imported cars and continues
to pursue measures to weaken its currency. India,
meanwhile, just announced legislation that would allow
the government to tax any overseas merger dating
back to 1962 in which an underlying Indian asset
was transferred. Whether the legislation becomes
law remains to be seen; however, protectionism still
runs deep in India. In China intellectual property right
infringements and Beijing’s championing of state
enterprises at the expense of foreign firms are but
two challenges confronting U.S. firms. Many more
barriers/obstacles to doing business exist in China as
well, with rising Chinese manufacturing wages chief
among them. The “China Price” is not so attractive
any more.
Against this backdrop, savvy and experienced U.S.
firms understand all too well the perils and promise
of the developing nations, and recognize that making
money in these markets is not easy and fraught with
risk. Hence, the continued and long-term importance
of Europe to their global success and bottom line. It
is Europe’s wealthy consumer market, a transparent
rule of law, a liberal investment environment, and
proximity to large, untapped emerging markets that
makes Europe corporate America’s profit center.
In the end, notwithstanding Europe’s cyclical
weakness due to the sovereign debt crisis, the region’s
fundamentals and underlying attributes remain solid.
The case for investing in Europe— and the justification
for U.S. companies staying the course—remains very
much intact.
About the author
Joseph Quinlan is a leading expert on the transatlantic
economy and a well known economist/strategist on Wall
Street. He specializes in global capital flows, foreign
direct investment, international trade, and multinational
strategies.
Mr. Quinlan lectures on finance and global economics at
New York University and Fordham University. In 1998,
he was nominated as an Eisenhower Fellow. Presently,
he is a Senior Fellow at the Center for Transatlantic
Relations and a Fellow at the German Marshall Fund. He
served as a Bosch Fellow at the Transatlantic Academy
in 2011.
In 2006, the American Chamber of Commerce to
the European Union awarded Mr. Quinlan the 2006
Transatlantic Business Award for his research on U.S.Europe economic ties. In 2007, he was a recipient of
the European-American Business Council Leadership
award for his research on the transatlantic partnership
and global economy.
issues. He has testified before the European Parliament.
He has served as a consultant to the U.S. Department
of State and presently serves as the U.S. representative
(Economic Policy Committee) to the Organisation for
Economic Co-operation and Development in Paris,
France for the U.S. Council for International Business.
He is also a board member of Fordham University’s
Graduate School of Arts and Science and serves on
Fordham University’s President Council.
He is the author, co-author, or contributor to twenty
books. His most recent book, “The Last Economic
Superpower: The Retreat of Globalization, the
End of American Dominance, and What We Can Do
About It” was released by McGraw Hill in November
2010. He has published more than 125 articles on
economics, trade and finance that have appeared in
such venues as Foreign Affairs, the Financial Times, The
Wall Street Journal and Barron’s. He regularly appears
on CNBC, as well as Bloomberg television, PBS and other
media venues.
Mr. Quinlan regularly debriefs policy makers and
legislators on Capitol Hill on global trade and economic
About AmChams in Europe
Founded in 1963, AmChams in Europe (the European
Council of American Chambers of Commerce) is a
network of American Chambers of Commerce across
Europe. Its mission is to exchange best practice ideas,
mutual member company benefits and to provide a
forum for discussion, debate and where necessary
representation on issues relevant to the European
business environment. AmChams in Europe’s member
companies account for more than $1.1 trillion in
investment on both sides of the Atlantic.
The Case for Investing in Europe
31
AmChams in Europe
AmChams in Europe
www.amchamsineurope.com
AmCham Georgia
www.amcham.ge
AmCham Norway
www.amcham.no
AmCham Poland
www.amcham.pl
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www.amcham.hu
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www.amcham.hr AmCham Latvia
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www.amchamspain.com
AmCham Cyprus
www.cyaba.com.cy AmCham Lithuania
www.amcham.lt
AmCham Luxembourg
www.amcham.lu AmCham Sweden
www.amchamswe.se
American Business Forum
in Turkey (ABFT)
www.abft.net
AmCham EU
www.amchameu.eu
AmCham Macedonia
www.amcham.com.mk
AmCham Malta
www.amcham-malta.org
AmCham Moldova
www.amcham.md
AmCham Finland
www.amcham.fi AmCham Montenegro
www.amcham.me
AmCham France
www.amchamfrance.org
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AmCham Albania
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www.amcham.be AmCham Czech Republic
www.amcham.cz AmCham Denmark
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Turkish-American Business
Association (TABA)
www.amcham.org
AmCham Ukraine
www.chamber.ua
BritishAmerican
Business (BAB)
www.babinc.org
AmChams in Europe
(European Council of American Chambers of Commerce)
c/o AmCham EU
Avenue des Arts 53
B-1000 Brussels
Belgium
T (32 2) 289 10 14
E [email protected]
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