Foreign direct investment and multinationals
Internationalisation makes a positive contribution to a country’s productivity and ultimately its prosperity. Foreign direct investment is an important tool in international economic integration as it brings in capital from one economy into another. Globally, the Netherlands is among the countries with the largest foreign direct investment, both inward and outward. Multinationals are important actors in foreign direct investment and are therefore interesting to study in more detail in this chapter. This chapter first discusses inward and outward direct investment into and by the Netherlands. It then zooms in on the multinationals, distinguishing between foreign-controlled and Dutch-controlled multinationals. Finally, it looks at how Dutch multinationals invest abroad.
5.1Key findings
Foreign direct investment (excluding SPEs)
- As in previous years, in 2022 the Netherlands was one of the countries with the largest foreign direct investment (FDI) worldwide. This applies to both inward FDI and outward FDI.
- Just as in 2021, the US and the UK were the most important partner countries for both Dutch inward FDI and outward FDI. In 2020, the UK replaced the US as top recipient of outward FDI.
- The total inward FDI position of the Netherlands increased by 3% in 2022 compared to 2021. The total outward FDI position of the Netherlands decreased by 1%. The FDI position is still below the pre-pandemic level of 2019.
Multinationals in the Netherlands
- In 2021, the Dutch business economy had approximately 25.1 thousand multinational enterprises (MNEs), 64% of which were under foreign control and 36% under Dutch control. This amounted to 1.8% of the total Dutch business economy.
- MNEs provided work for almost 2.3 million people in the Netherlands, accounting for 35% of total employment in the Dutch business economy in 2021. Compared to 2019, multinationals had 26 thousand fewer employed persons in 2021.
- 35% of all MNEs are active in the wholesale and retail sector. With 666,000 employed persons, these MNEs provide almost 40% of employment in wholesale and retail trade.
- One in five foreign multinationals (almost 3 thousand firms) in the Netherlands were US-owned in 2021, followed by German control (almost 2.4 thousand firms). In 2021, the US was also the largest foreign employer in the Dutch business economy with approximately 250,000 employed persons.
- In 2021, MNEs were responsible for 78% of goods imports and 83% of goods exports. In service imports and exports, 91% of the value was accounted for by MNEs.
- Foreign-owned multinationals were on average 23% more productive than non-multinationals in 2020. Dutch-owned multinationals showed a gain in productivity of 17%.
Dutch multinationals abroad
- Dutch-owned multinationals have the most subsidiaries in Germany and that number even increased from 2018 to 2019.
- The manufacturing and agricultural sectors have the largest share of vertical investments in relative terms, in contrast to the trade and services sectors, where the share of vertical investments is significantly smaller.
- Of the firms investing horizontally, a relatively large proportion are non-exporters. Manufacturers, where investing and exporting seem to go hand-in-hand, form an exception. As a result, there are indications that the choice of investment is largely determined by the sector in which the parent company operates.
Outline
This chapter will consider foreign direct investment (FDI) in and by the Netherlands. Section 5.2 will discuss the direct investment position of the Netherlands, based on macro figures from the Dutch central bank (DNB) and OECD. Multinationals are key actors in international investment flows to and from the Netherlands. Foreign multinationals in the Netherlands are discussed in section 5.3 and Dutch multinationals with subsidiaries abroad are the focus of section 5.4. CBS figures on the Inward and Outward Foreign Affiliates Statistics are used for this purpose. Section 5.4 also further examines the relationship between international trade and investment. This will distinguish between horizontal and vertical investment, which may explain much of the issue of trade and investment complementarity.
5.2Macro-level view of foreign direct investment
This section discusses the direct investment position of the Netherlands. An enterprise receiving direct investments from abroad is an enterprise in which a foreign investor holds at least 10% of the ordinary share capital or the voting rights, or the equivalent thereof. This involves having a controlling interest and gaining a substantial influence on the management of the enterprise, for example as a result of a merger, an acquisition, the construction of new facilities, reinvested earnings from foreign activities or loans between different elements of the enterprise.
Contrary to previous editions of Dutch Trade in Facts and Figures, the figures and rankings in this section relate to directional figures. This means that investments from the subsidiary to the parent company are netted against the investments from the parent company to the subsidiary (‘reverse investments’). Previous editions of Dutch Trade in Facts and Figures published figures based on assets/liabilities. Since this method does not involve netting, positions can be artificially inflated, which is why international organisations recommend the directional approach for analysing direct investment relationships.
The Netherlands is among the largest countries in the world for investment
As in previous years, the Netherlands is globally among the countries with the largest foreign direct investment in 2022. This applies both to investment from abroad in the Netherlands (inward investment) and investment from the Netherlands abroad (outward investment). Excluding special purpose entities (SPEs), the Netherlands ranks fourth in terms of its inward direct investment position, following the US, China and the UK (Figure 5.2.1). As regards outward investment without SPEs, the Netherlands is the second-largest country, after the US (OECD, 2023).noot1
Globally, foreign investment transactions fell by 24% in 2022 relative to 2021. This decline follows a year of exceptional growth: following a drop in direct investment activity during the first COVID year, the value of global flows almost doubled in 2021 compared to 2020. As in 2021, the US and China were the most significant destinations of worldwide new foreign direct investment in 2022. Together, these two countries accounted for approximately 40% of new investments. The US was also the source of well over 30% of new investments in other countries, with Japan, China and Germany following far behind (OECD, 2023). As in 2021, 2022 witnessed negative inward and outward investment transactions in the Netherlands. As well as capital withdrawals (sale of existing interests), loan repayments of subsidiaries to the parent company, for example, can also create negative flows. A considerable part of the increase in the inward investment position of the Netherlands in 2022 relates to exchange rate developments and revaluations, since the investment position is affected not only by transactions, but also by revaluations, exchange rate changes and other volume changes.
Over the years, there have been large fluctuations in global direct investment transactions, heavily influenced by specific events such as major restructurings of multinationals and they may even be largely determined by a handful of enterprises. As an example, the global decline in 2022 compared to 2021 is largely due to capital withdrawals by only one Luxembourg-based multinational. Excluding Luxembourg, global flows fell by 5% in 2022 (OECD, 2023).
The direct investment position of the Netherlands
Relative to 2021, the total inward investment position of the Netherlands rose by 3% in 2022 to €3,930 billion. Compared to the previous year, the total outward investment position of the Netherlands fell by 1% in 2022 to €4,818 billion. The investment position was thus still below the pre-coronavirus levels of 2019; the inward position was 3% lower than at the end of 2019 and the outward position lagged 6%.
Investments of the Netherlands are concentrated in three statistical sectors (Figure 5.2.2). In 2022, special purpose entities (SPEs) accounted for about a third of the inward and outward direct investment position of the Netherlands. SPEs are Dutch-based subsidiaries of foreign enterprises that serve as intermediaries for international money flows in mainly dividends and interest. The inward investment position of SPEs remained virtually constant in 2022, amounting to €1,327 billion by the end of the year, while the outward investment position saw a decline of 1%, to €1,635 billion. Holding companies, whose activity mainly consists of financial services within their own group of enterprises, also accounted for about a third of the direct investment position in 2022. Non-financial enterprises account for almost all other direct investments. In 2022, they were responsible for approximately 30% of the investments. Only 4% of the outward investment position and 2% of the inward investment position are accounted for by the remaining sectors, such as banks, other financial services providers, the government and households.
| Jaar | SPEs | Holdings | Non-financial corporations | Other |
|---|---|---|---|---|
| Inward | . | . | . | . |
| 2022 | 1327 | 1361 | 1167 | 75 |
| 2021 | 1322 | 1344 | 1097 | 68 |
| 2020 | 1378 | 1344 | 873 | 73 |
| 2019 | 2739 | 296 | 950 | 59 |
| 2018 | 2712 | 168 | 1082 | 44 |
| Outward | . | . | . | . |
| 2022 | 1635 | 1544 | 1459 | 180 |
| 2021 | 1649 | 1657 | 1367 | 179 |
| 2020 | 1722 | 1573 | 1255 | 167 |
| 2019 | 3081 | 523 | 1360 | 165 |
| 2018 | 3059 | 319 | 1456 | 158 |
| 1)A shift is visible from SPEs to holdings between 2019 and 2020. This is because in 2020, the definition used for SPEs was aligned with that used by the IMF. Among other things, this definition prescribes that an SPE may have a maximum of five employees, is under the direct or indirect control of a foreign party as a subsidiary, has virtually no physical presence or production in the country of incorporation and is located there primarily to obtain specific (e.g. tax) benefits. | ||||
US and UK continue to be key investment partners
The United States invariably tops the Dutch ranking of inward investment partners. Excluding money flows via Dutch-based SPEs, the United Kingdom, Germany and Luxembourg complete the top 4 list (Figure 5.2.3). At the end of 2022, these four countries were responsible for approximately 60% of total investments in the Netherlands. For the past three years, the ranking of countries in which the Netherlands invests, excluding SPEs, has consistently included the UK, the US, Switzerland and Germany (Figure 5.2.4). In 2022, the top 4 accounted for more than 40% of Dutch outward direct investment.
The changes in the ranking over time are attributed by events at individual enterprises. For example, the inward investment position’s decline with Luxembourg in 2022 is largely triggered by the restructuring of a Luxembourg-based multinational and the UK’s rise in 2021 is mainly attributable to Shell’s relocation from the Netherlands to the UK. It should be noted that Luxembourg, like the Netherlands, owes its position partly to its role as a conduit country (DNB, 2022). That is because the rankings presented refer to the country where the investment originates directly. There is often a disparity between the direct source of an investment and the original country where the direct investment actually originates.
| US | UK | Germany | Luxembourg | |
|---|---|---|---|---|
| 2018 | 2 | 3 | 4 | 1 |
| 2019 | 2 | 4 | 3 | 1 |
| 2020 | 1 | 3 | 4 | 2 |
| 2021 | 1 | 2 | 4 | 3 |
| 2022 | 1 | 2 | 3 | 4 |
| UK | US | Switzerland | Germany | |
|---|---|---|---|---|
| 2018 | 2 | 1 | 3 | 5 |
| 2019 | 2 | 1 | 4 | 5 |
| 2020 | 1 | 2 | 3 | 4 |
| 2021 | 1 | 2 | 3 | 4 |
| 2022 | 1 | 2 | 3 | 4 |
5.3Multinationals in the Netherlands
This section looks specifically at the enterprises that invest: the multinationals. How many multinationals are there in the Dutch business economy? What proportion of employment in the Dutch business economy is accounted for by multinational enterprises? Which industries are they active in? Which countries control the foreign-owned multinationals? And what is the impact of multinationals for Dutch goods and services trade?
What is a multinational?
A multinational is an enterprise with ultimate control over enterprises in two or more countries. A Dutch-owned multinational is an enterprise under ultimate Dutch control with at least one subsidiary (majority stake) abroad. A foreign-owned multinational is a subsidiary based in the Netherlands that is ultimately controlled from abroad. Agriculture, forestry and fishing are not included in the population of the non-financial Dutch business economy, nor are financial institutions, public administration, education, health care, culture, sports and recreation, ideological and political organisations, wellness and funeral services, households, and extraterritorial organisations and bodies.
Foreign direct investment leads to capital inflows in the country of destination. For the vast majority of multinationals, foreign direct investment (FDI) serves one or more of the following motives: market expansion, gaining access to more efficient or cheaper factors of production, and the acquisition of knowledge and brand names (Freeman et al., 2022). Multinationals create jobs and contribute knowledge when they relocate to a new country through foreign direct investment. Multinational enterprises allocate relatively large resources to research and development, and technological innovation. Multinationals are therefore considered to be important gateways to international markets. They link the domestic value chain with the global value chain (Cadestin et al., 2019).
The number of multinationals has grown, though not as rapidly as non-multinationals
Figure 5.3.1 shows that the Netherlands has increasingly more multinationals. In 2021, the most recent year for which data are available, 25,100 multinationals were active in the Dutch business economy, representing 1.8% of the Dutch business economy as a whole. In 2021, there were about 5% more multinationals compared to 2019. Despite the growth in the number of multinationals, their share in the business economy slightly dropped in that same period, because the number of non-multinationals (especially self-employed persons) grew faster, i.e. by more than 10%.
CBS can make a distinction between Dutch and foreign-owned multinationals. Of the multinationals, 64% were under foreign control in 2021 and 36% were in Dutch hands. The Netherlands is among the top most dynamic and competitive knowledge economies in the world. In 2021, the Netherlands ranked fourth in the International Institute for Management Development rankings, making it one of the most competitive economies worldwide (IMD, 2021). In comparison with other EU countries, the share of foreign-owned multinationals in the non-financial Dutch business economy as a whole is similar to that for Germany (Eurostat, 2023a and 2023b). This share is significantly lower for countries such as France, Belgium and Italy: the Dutch position as a stable economic hub is an appealing position for foreign-owned enterprises. In turn, foreign-owned enterprises can contribute to strengthening Dutch innovation ecosystems and making the Dutch economy more sustainable and digital (Wiebes, 2020). There can also be a downside to the multinationals’ investments, consider, for example, multinationals relocating their polluting activities to countries with weaker environmental regulations to avoid the compliance costs of their home countries (Narula & Pineli, 2019; Cuervo-Cazurra et al., 2021).
| Jaar | Multinationals |
|---|---|
| 2011 | 21.09 |
| 2012 | 20.83 |
| 2013 | 21.625 |
| 2014 | 22.165 |
| 2015 | 22.36 |
| 2016 | 22.96 |
| 2017 | 23.67 |
| 2018 | 23.69 |
| 2019 | 23.945 |
| 2020* | 24.53 |
| 2021* | 25.12 |
35 in 100 work at multinationals, but multinational employment boom stalled in 2018
Figure 5.3.2 shows that both Dutch-owned and foreign-owned multinationals employed nearly 2.3 million people in the Netherlands in 2021. They thus account for 35% of total employment in the Dutch business economy. In comparison with the previous year, multinationals employed net fewer than 26,000 people in 2021; a drop of 1.1%. Even though multinationals make up a very small proportion of the Dutch business population (approximately 2%), they do provide a substantial proportion of employment in the Netherlands.
Employment at multinationals increased by 19% in the period 2010–2018. Over the same period, the number of persons in employment working for non-multinationals increased by 15%. As of 2018, the two groups show the opposite trend. Employment among non-multinationals rose even further after 2018, while it fell among multinationals. In recent years (2018–2021), multinationals saw the number of employed persons decrease by a total of 128,000. Non-multinationals employed an additional 106,000 people during the same period. Particularly Dutch-owned multinationals saw a contraction in employment since 2018. The reason for this is international economic competition, as a result of which Dutch enterprises are increasingly focusing on and specialising in the more high-value activities in the value chain. (Wiebes, 2020).
| Jaar | Multinationals | Non-multinational firms |
|---|---|---|
| 2011 | 2050 | 3555 |
| 2012 | 2054 | 3551 |
| 2013 | 2038 | 3490 |
| 2014 | 2048 | 3496 |
| 2015 | 2096 | 3575 |
| 2016 | 2155 | 3684 |
| 2017 | 2245 | 3782 |
| 2018 | 2383 | 4046 |
| 2019 | 2281 | 4092 |
| 2020* | 2222 | 4044 |
| 2021* | 2255 | 4152 |
One in three multinationals in wholesale trade versus one in five in Dutch business economy
As Figure 5.3.3 shows, the distribution of multinationals by industry differs significantly from the Dutch business economy as a whole. Approximately 35% of all multinationals were active in the wholesale and retail trade. This industry also has a considerable share in the Dutch business economy as a whole, albeit to a lesser extent (21%). Furthermore, in 2021, multinationals in the Netherlands were particularly represented in the specialised business services sector and the manufacturing sector. This composition is similar to that in 2020 and similar for foreign-owned and Dutch-owned multinationals.
| Type bedrijf | Manufacturing | Wholesale and retail trade | Transportation and storage | Information and communication | Specialised business services | Renting/leasing and other business services | Other sectors |
|---|---|---|---|---|---|---|---|
| Foreign-owned multinationals | 13 | 37 | 6 | 12 | 17 | 5 | 9 |
| Dutch-owned multinationals | 16 | 30 | 6 | 10 | 19 | 6 | 12 |
| Total Dutch business economy | 6 | 21 | 4 | 8 | 30 | 7 | 25 |
Dutch-owned multinationals largest employer on average
Figure 5.3.4 shows the average number of employed persons per different type of enterprise for 2021. Non-multinationals employed an average of four people in 2021. This number is significantly higher for multinationals, with an average of 71 persons working for a foreign-owned multinational. Approximately 123 persons were on the payroll of Dutch-owned multinationals. The large differences in employment between multinationals and non-multinationals are mainly driven by the large proportion of self-employed persons in the group of non-multinationals. Dutch-owned multinationals and foreign-owned multinationals encompass far fewer enterprises. However, these groups also contribute greatly to Dutch material prosperity and employment because they tend to be large in terms of turnover and number of employed persons.
| Type bedrijf | Average employment |
|---|---|
| Foreign-owned multinationals | 71 |
| Dutch-owned multinationals | 123 |
| Non-multinational firms | 3 |
| 1)Was calculated by dividing the total number of employed persons per firm by the number of firms per type. | |
Half of the employment at multinationals realised in wholesale and retail trade and manufacturing
Figure 5.3.5 shows that wholesale and retail trade and manufacturing are the largest employers among the Dutch-based multinationals. Approximately half of all employed persons on the payroll of a multinational worked in either of these two industries. For the business economy as a whole, both industries accounted for just under 40% of employment. The distribution of employment by industry is comparable to that in 2020. The same industries return in the top three employment opportunities for Dutch-owned and foreign-owned multinationals in 2021, albeit in a different order than in the previous year.
| Type bedrijf | Manufacturing | Wholesale and retail trade | Transportation and storage | Information and communication | Specialised business services | Renting/leasing and other business services | Other sectors |
|---|---|---|---|---|---|---|---|
| Foreign-owned multinationals | 21 | 29 | 11 | 9 | 8 | 14 | 8 |
| Dutch-owned multinationals | 16 | 30 | 9 | 5 | 9 | 22 | 9 |
| Total Dutch business economy | 13 | 26 | 7 | 6 | 13 | 17 | 18 |
19% of foreign-owned multinationals under US control
Most foreign-owned multinationals in the Dutch business economy are under US, German, UK, Belgian or French control (Figure 5.3.6). The US is still our main investment partner in terms of the number of multinationals operating in the Netherlands. There were almost 3,000 US-controlled enterprises in the Netherlands in 2021, representing 19% of all enterprises under foreign control, followed by Germany, with almost 2,400 enterprises. There are various reasons for foreign-owned enterprises to locate in the Netherlands: the favourable location in Europe, the highly developed logistics and data infrastructure, the relatively well educated Dutch population, and the favourable business climate exert great pulling power on foreign investors.
The top 10 list of countries controlling most foreign-owned multinationals in the Netherlands has changed little over time. For all the countries in the top 10, we see that the enterprise population under their control rose compared to 2015. A striking point in the figures is that the number of Swedish-controlled enterprises grew by 130 in 2021 compared to 2015, to 480. Sweden thereby surpasses China as the eighth country of origin. The number of Chinese-controlled enterprises also increased, albeit less sharply than Swedish enterprises.
| Herkomst | 2021* |
|---|---|
| US | 2990 |
| Germany | 2375 |
| UK | 1735 |
| Belgium | 1730 |
| France | 955 |
| Japan | 630 |
| Switzerland | 555 |
| Sweden | 480 |
| China | 450 |
| Denmark | 350 |
As in the past six years, the United States was also the largest foreign employer in the Dutch business economy in 2021. Some 250,000 people worked for enterprises with a US parent in 2021. The 955 French multinationals based in the Netherlands accounted for 150,000 jobs in 2021. As such, French multinationals employ 157 people on average. American and German multinationals provided employment for an average of 84 and 75 people, respectively. Japanese multinationals have seen an increase in employment by 53,000 additional employed persons.
British multinationals provided about 104,000 jobs in 2021, which results in 33,000 fewer jobs in comparison with 2015. Despite the decreasing number of employed persons, the number of British multinationals in the Netherlands did increase. Even with a Brexit deal in place, the Netherlands continues to be in demand by British enterprises. Many enterprises in the UK are experiencing issues such as extra administrative burden, customs and other procedures, delivery times and delays in access to the European market (Rijksoverheid, 2021). British SMEs in particular look to the Netherlands because of its good infrastructure, fast digital connections, and highly educated and well English-speaking workforce (De Wit, 2021; Ebbers, 2020). This may explain why employment in the Netherlands by British multinationals decreased while the number of British enterprises increased.
Multinationals and international trade: a good match?
The Netherlands is a true trading nation. External trade and investment are essential to Dutch economy. Therefore, the Netherlands cannot do without a properly functioning global economy. For a small country like the Netherlands, it is important for enterprises to export abroad as the domestic market is small. Multinational enterprises are the largest players in international trade. They can use their foreign affiliates as export platforms (Wang, 2021) and are on average larger, more capital-intensive, more productive and they invest more in R&D (De Backer et al., 2019).
The group of international traders is significantly larger among multinationals than among non-multinationals. In delineating the multinationals, the only consideration is having a subsidiary. In other words, multinationals do not necessarily need to import or export goods and/or services. Whereas almost one in three non-multinationals did business abroad in 2021, this share was 90% for multinationals. This is a sector-related share: in manufacturing, 4% of multinationals do not trade with foreign countries; in real estate the share is 35%. Scientific literature has previously shown that an enterprise’s sector determines the investment choice. Section 5.4 discusses the relationship between investment and international trade. Among multinationals, we see that 68% both export and import.noot2
In addition to the relatively large role that multinationals play in employment in the Netherlands, they also account for a large proportion of international trade. Whereas multinationals only take up around 1.8% of the Dutch business economy as a whole, they were responsible for 78% of imports and 83% of exports of goods in 2021 (Figure 5.3.7). Foreign-owned multinationals account for the majority of these goods imports and exports. The role of non-multinationals in Dutch goods trade was slightly larger in 2021 than in 2019. In the international trade in services, multinationals accounted for a total of 91% of the import and export value in 2021. Again, foreign-owned multinationals contribute the bulk of these imports and exports.
| Handelsstroom | Foreign-owned multinationals | Dutch-owned multinationals | Non-multinational firms |
|---|---|---|---|
| Goods | . | . | . |
| Imports | 201.2 | 88.9 | 80.2 |
| Exports | 235.0 | 113.0 | 72.9 |
| Services | . | . | . |
| Imports | 133.2 | 26.3 | 15.0 |
| Exports | 130.5 | 31.9 | 17.2 |
Multinationals, especially foreign-owned multinational enterprises, more productive than the rest
To survive on a foreign market, multinationals need to compensate their ‘liability of foreignness’ against local enterprises by means of additional competitiveness (Zaheer, 1995). These disadvantages of being ‘foreign’ are mostly in the costs incurred by foreign enterprises to learn the Dutch language, the regulations, culture and market, among other things. Foreign enterprises will only invest in the Netherlands if they are able to compensate these costs with, for example, better or cheaper products or production processes than Dutch enterprises (Fortanier, 2008; De Vaal et al., 2009).
The more productive enterprises are, the more value they can add to a country’s economy. Productivity is one of the most important factors in economic success and prosperity. Productivity is measured here based on multifactor productivity (MFP). MFP is that portion of output volume changes not caused by changes in the use of inputs. It reflects the efficiency of combining different factors of production. The CBS Internationalisation Monitor Q4 2022 linked new productivity estimates to internationalisation, innovation and business dynamics (CBS, 2022).
On average, multinationals in Dutch business economy are more productive than enterprises not under the control of an international corporation (Figure 5.3.8). This has also been repeatedly demonstrated in literature (e.g. Greenaway and Kneller, 2007). We also see differences in average productivity within the group of multinationals. The average productivity of Dutch-owned multinationals is almost 17% higher than that of enterprises not under the control of an international corporation. For foreign-owned multinationals, this productivity gain is even as high as 23%.
| Type multinational | Productivity gain relative to non-multinational firms |
|---|---|
| Foreign-owned multinationals | 23 |
| Dutch-owned multinationals | 17 |
| 1)Calculations of productivity differences took into account variations in sector composition between multinationals (foreign-owned and Dutch-owned) and non-multinational firms. | |
Size of enterprise, type of multinational, trading status and innovation all play a key role as explanatory factors for differences in productivity between enterprises. There are significant differences in productivity between enterprises, even within narrowly defined industries in which enterprises are fairly homogeneous in terms of activities (Syverson, 2011). For example, the productivity premium of foreign-owned multinationals, relative to non-multinationals, is significantly higher in the Netherlands for enterprises operating in the food, beverages and tobacco industry.
5.4Dutch multinational activity abroad
This section focuses on Dutch-owned multinationals abroad: in which countries do they operate and how many jobs are created through foreign subsidiaries? The section also sets out the trends of Dutch multinational activity abroad and looks at the types of investments made by Dutch-owned multinationals with subsidiaries in foreign countries. Finally, it explores the impact of a country’s income level on the type of investment made by Dutch-owned multinationals.
Number of subsidiaries in Mexico increasing by one quarter in 2019
Figure 5.4.1 shows the number of foreign subsidiaries under Dutch control. Dutch-owned multinationals have the most subsidiaries in Germany and that number grew from 2,585 to 2,915 subsidiaries between 2018 and 2019. Dutch-owned multinationals were also well represented in the US in 2019, by 1,890 subsidiaries.
US research firm Kearney has been compiling the FDI Confidence Index annually since 1998, a ranking of countries likely to attract the most investments over the next three years (Peterson & Toland, 2023). For the first time in 2023, an FDI Confidence Index ranking was made specifically for developing countries. China, India and the United Arab Emirates top this list of future attractive developing countries in terms of investment. China has been an important partner for the Dutch business economy for years. The number of subsidiaries of Dutch-owned multinationals in that country rose to 695 in 2019, representing a 5% increase over the previous year. Dutch-owned multinationals were also increasingly setting up subsidiaries in India and the United Arab Emirates in 2019. Although investments by Dutch-owned multinationals in these countries are relatively small compared to large investment partners such as Germany, we do see an uptake of subsidiaries in these countries in 2019 compared to 2018, of 8% and 10%, respectively. Mexico ranks eighth on the FDI Confidence Index of developing countries and despite its relatively small number of subsidiaries, it does show strong growth in the number of subsidiaries among enterprises under Dutch control. The number of subsidiaries rose by 25% in 2019 compared to 2018.
| Bestemmingen | 2019 | 2018 |
|---|---|---|
| Top 5 countries for subsidiaries |
. | . |
| Germany | 2913 | 2584 |
| US | 1890 | 1865 |
| France | 1049 | 973 |
| Romania | 939 | 1059 |
| Spain | 921 | 873 |
| Investment countries according to FDI Confidence Index for developing countries |
. | . |
| China | 695 | 660 |
| India | 260 | 240 |
| Brazil | 245 | 245 |
| UAE | 225 | 205 |
| Mexico | 175 | 140 |
Increasing number of employed persons working for German subsidiaries under Dutch control
In addition to the number of subsidiaries, the number of employees at subsidiaries in Germany also recorded a growth in 2019 compared to 2018 (Figure 5.4.2). While there were 327,000 employed persons in 2018, the figure rose to almost 350,000 in 2019. The number of employed persons working for Dutch-owned multinationals in China and India also grew by 7% and 14% respectively between 2018 and 2019.
The number of people working for subsidiaries of Dutch-owned multinationals in Mexico remained the same in 2018 and 2019, i.e. 37,000 employed persons. Relatively speaking, subsidiaries in Mexico do offer more employment per subsidiary on average than China and Germany. Whereas in 2019 there was an average of 111 employed persons per Dutch subsidiary in China and an average of 120 in Germany, the average for Mexico was 211. Given the rise in the number of subsidiaries in 2019 with no change in the number of employees, average employment per Mexican subsidiary did fall compared to the previous year.
| Bestemmingen | 2019 | 2018 |
|---|---|---|
| Top 5 countries for subsidiaries |
. | . |
| Germany | 349 | 327 |
| US | 299 | 293 |
| France | 166 | 193 |
| Romania | 84 | 89 |
| Spain | 94 | 142 |
| Investment countries according to FDI Confidence Index |
. | . |
| China | 77 | 71 |
| India | 39 | 34 |
| Brazil | 47 | 48 |
| UAE | 12 | 11 |
| Mexico | 37 | 37 |
What is the relationship between a country’s income level and the type of investment made by enterprises?
In order to determine the relationship between a country’s income level and the choice of types of investment made by enterprises, it is important to first take a closer look at the different type of investment. We can divide investments made by parent companies in subsidiaries abroad into roughly two categories: horizontal and vertical investments. Figure 5.4.3 illustrates the value chain of a Dutch parent company with a foreign subsidiary. Enterprise groups (parent company) with associated subsidiaries are determined based on OFATS 2019, where we analyse only extra-EU foreign direct investment.noot3
We refer to horizontal investment if the foreign subsidiary carries out the same activities as the Dutch parent company. An example of a horizontal investment is when both the Dutch parent company and the foreign subsidiary manufacture cars. The comparison of activities is made on the basis of 2‑digit SBI code.noot4 If the SBI codes of the parent company and the subsidiary match, we classify the investment as a horizontal investment.noot5
If the foreign subsidiary carries out a different activity than the Dutch parent, this is referred to as a vertical investment. In that case, the SBI codes of the parent company and the subsidiary deviate from each other. When it comes to vertical investment, we can further distinguish between upstream and downstream vertical investment. Upstream vertical investment applies when the foreign subsidiary of the aforementioned Dutch car manufacturer produces parts for the production of cars by the Dutch parent company. An example of a downstream vertical investment is when the foreign subsidiary would be a distributor of the parent company’s cars. However, in this section we will limit ourselves to the general split between horizontal and vertical investments.
There are numerous motives to opt for horizontal or vertical investment. Matters such as trade barriers and import tariffs at the border can complicate enterprises’ trading activities and may prompt horizontal investment. The market can then be served with domestically produced goods, rather than imported goods from elsewhere that may encounter trade barriers and import duties. Although the initial cost of investment is higher than that of exports, the variable costs are actually considerably lower, which is known as the proximity-concentration trade off (Brainard, 1997). According to this theory, enterprises weigh up variable costs as trade barriers and transport costs on the one hand and investment barriers on the other hand. There is a wide variety of motives for both horizontal and vertical investment. A commonly discussed reason for (upstream) vertical investment is the reduction of production costs. Similarly, relocating part of the value chain to a region high in knowledge and expertise can also provide a reason for vertical investment. This is just a selection of motives. Control over a larger part of the value chain can be another motivation for vertical investment, where enterprises do try to keep variable costs as low as possible by investing locally.
First, we will examine the sector’s influence on the investment choice of an enterprise. For example, do the agriculture and manufacturing sectors invest more vertically than the service sector? Next, we will examine whether Dutch-owned multinationals invest more vertically in countries with lower income levels, for example, to minimise the wage costs (part of the production costs) or whether they in fact invest more vertically in countries with higher income levels to improve productivity, for example.
Relatively more vertical investment in agriculture and manufacturing
Figure 5.4.4 shows the number of subsidiaries of Dutch-owned multinationals in non-EU countries by type of investment and sector in 2019.noot6 Parent companies operating in the service sector had about 3,080 foreign subsidiaries in 2019, thereby mainly investing horizontally (2,555). Also, for parent companies active in the trade sector, foreign direct investment was mostly of a horizontal nature. The manufacturing sector had 2,080 subsidiaries. The horizontal and vertical distribution was about 50-50 in this. The large number of horizontal investments in figure 5.4.4 is consistent with the global perception of there being more horizontal foreign direct investment than vertical foreign direct investment (Phung, 2021).
| Sector | Type | Number |
|---|---|---|
| Agriculture etc. | Horizontal FDI, Agriculture etc. | 100 |
| Agriculture etc. | Vertical FDI, Agriculture etc. | 45 |
| Manufacturing | Horizontal FDI, Manufacturing | 1010 |
| Manufacturing | Vertical FDI, Manufacturing | 1070 |
| Electricity, water and construction |
Horizontal FDI, Electricity, water and construction |
180 |
| Electricity, water and construction |
Vertical FDI, Electricity, water and construction |
80 |
| Trade | Horizontal FDI, Trade | 1390 |
| Trade | Vertical FDI, Trade | 300 |
| Services etc. | Horizontal FDI, Services etc. | 2555 |
| Services etc. | Vertical FDI, Services etc. | 525 |
In percentage terms, the manufacturing and agriculture sectors have the highest share of vertical investment compared to the number of horizontal investments. Accounting for 51% and 32%, respectively, within the total investments of the respective sector, this seems to indicate a relatively high level of vertical investments within these sectors.
The share of vertical investment (18% and 17%, respectively) is significantly lower in the trade and service sectors. For manufacturing and agriculture, matters such as the reduction of production costs seem to be key in choosing vertical investment. Keeping control within the chain could also be a possible reason for investing vertically rather than outsourcing part of the operations. Components of the value chain may also be located in regions that have specific knowledge required for the production. Other matters such as minimising trade barriers or reaching out to other markets seem to play a central role in the trade and service sectors, which may be motives for the relatively high share of horizontal investment in these sectors. Another possible reason for the relatively low share of vertical investment in the trade and service sectors is that the value chain of a manufacturing company may be easier to divide into segments than the value chain of a service.
Little vertical investment in countries with a low income level
Figure 5.4.5 shows the share of horizontal and vertical investment by income group of the country in which the subsidiary is located and by the parent company’s sector. This classification is from the World Bank. The World Bank classifies economies in four income groups: high income, upper middle income, lower middle income and low income. This classification is based on the gross national income per capita, calculated according to the Atlas method (World Bank, 2019).
While it might be expected that the share of vertical investment would be relatively high in low-income countries in order to minimise production costs through lower wage costs, for example, Figure 5.4.5 shows that the share of vertical investment increases on average for the sectors as the income of the country of the subsidiary increases. On average for all sectors, the high-income category has a slightly lower share of vertical investment than the upper-middle income and lower-middle income categories. Although the reduction of production costs is described as a key motivation for vertical investment in scientific literature, there is also a broad palette of motives for investing vertically especially in high-income countries.
There may be activities within an enterprise’s value chain that require specific knowledge or a high level of training (Jinji et al., 2022). Enterprises may therefore choose to set up a subsidiary in a country with a higher level of development. Low-income countries or countries with low levels of development also bring more uncertainty. Enterprises may therefore also choose to invest vertically in a more developed country to secure a higher degree of certainty within the chain (Aizenman & Marion, 2001). Geopolitical pressures could also be a reason for relocating parts of the chain closer to home or to relatively more reliable countries in the future (Ahn et al., 2023). Relocating production to a country nearer is also referred to as reshoring or nearshoring. An example of reshoring is Tesla, which opened a factory in Germany in 2022 in addition to the production sites in the US and China (Niewold, 2023). Parts of the value chain could also in fact take place more productively in higher-income countries.
The gravity model of Jan Tinbergen, a common model to analyse trade, theorises that as distance from a country increases, trade decreases. This distance can be interpreted in a multidisciplinary manner, such that as differences in culture and language with a country widen, trade with that country decreases. Although the gravity model is widely applied to trade, cultural and language differences could also contribute to the relatively low share of vertical investment in low-income countries.
Whether or not to invest horizontally or vertically in the different types of countries will largely be determined by the sector in which the parent company operates. In addition to the average for all sectors, Figure 5.4.5 also specifically shows the types of investment for the manufacturing and service sectors. The share of vertical investment is relatively high in manufacturing, with the share in low-income and high-income countries being the highest. This would suggest that for manufacturing, matters such as the reduction of production costs, maintaining control in the chain, as well as gaining expertise, for example, are relatively more important drivers than, for instance, gaining market access. The latter, on the contrary, seems to be an important driver for the service sector. The service sector is relatively heavily driven by horizontal investment, with most horizontal investment being made in high-income countries. Finally, it should be noted that the choice for vertical investment will also depend on the type of vertical investment – upstream or downstream. However, we will not elaborate further on the type of vertical investment. It requires extra research to gain a better understanding of the motives for upstream and downstream vertical investment.
| Inkomensgroep | Horizontal FDI | Vertical FDI |
|---|---|---|
| High income |
. | . |
| All sectors | 73 | 27 |
| Manufacturing | 43 | 57 |
| Services etc. | 87 | 13 |
| Upper middle income |
. | . |
| All sectors | 70 | 30 |
| Manufacturing | 53 | 47 |
| Services etc. | 79 | 21 |
| Lower middle income |
. | . |
| All sectors | 71 | 29 |
| Manufacturing | 56 | 44 |
| Services etc. | 74 | 26 |
| Low income |
. | . |
| All sectors | 77 | 23 |
| Manufacturing | 52 | 48 |
| Services etc. | 78 | 22 |
Which countries are the most attractive to Dutch-owned multinationals per income group?
Table 5.4.6 shows which non-EU country has the most inward Dutch investments by income group, measured in numbers of subsidiaries. This is the total of horizontal and vertical investments. Most subsidiaries in the category of high-income and upper-middle-income countries are located in the US and China, respectively. Most investments in the lower-middle-income and low-income groups are in India and Ethiopia, respectively. Vertical and horizontal investments show a similar image, with the exception of the low-income group. Among the low-income group, most horizontal investments are found in Ethiopia and most vertical investments are in Tanzania.noot7
| Income group | Country |
|---|---|
| High income | United States |
| Upper middle income | China |
| Lower middle income | India |
| Low income | Ethiopia |
The global market is becoming increasingly competitive and direct investment has grown strongly since the 1980s. Developing countries are seeking to attract foreign-owned enterprises to invest in their countries in a variety of ways. Tax-friendly legislation and regulations and improved infrastructure are just a few examples of ways to attract more foreign direct investment.
India is the most attractive investment country for the Netherlands within the lower-middle-income group. India has become more attractive to foreign direct investment following reforms by the government led by Prime Minister Modi in 2014, showing an increase in foreign direct investment especially in the last decade (Dohmen, 2023). Ethiopia has the highest level of investment in the low-income category. Ethiopia’s Prime Minister Abiy Ahmed has also announced numerous reform plans, including plans to reduce the state’s dominance in certain sectors in an attempt to become more attractive to foreign investors. Despite its relatively small economic size, Ethiopia is one of the strongest growing economies in the world and it is the second most populous country in Africa. Ethiopia’s labour force is expected to make up a large proportion of the total population in the future, which will only make the country more attractive to foreign investors (Deloitte, 2019).
However, investment in Ethiopia was still very minimal in 2019. Even though investments in Ethiopia are about three times higher than the average investments in low-income countries, this is still less than 1% of the investments Dutch-owned multinationals have in, for instance, Germany. Given the very limited size of investments in Ethiopia, we do not include these investments in the following analyses.
Relatively many vertical investments in manufacturing in both high-income and low-income countries
Figure 5.4.7 shows the distribution by horizontal and vertical investment of the largest investment countries by income group in 2019, on average for all sectors and for the manufacturing and service sectors specifically. We can see that these three follow the general picture of the distribution by income group outlined in Figure 5.4.5. In Figure 5.4.7, we can once again see predominantly horizontal investments for all sectors on average. Manufacturing has a relatively high share of vertical investments, while in contrast, the service sector has a relatively high share of horizontal investments.
| Sector | Horizontal FDI | Vertical FDI |
|---|---|---|
| United States | . | . |
| All sectors | 77 | 23 |
| Manufacturing | 50 | 50 |
| Services etc. | 91 | 9 |
| China | . | . |
| All sectors | 75 | 25 |
| Manufacturing | 59 | 41 |
| Services etc. | 86 | 14 |
| India | . | . |
| All sectors | 74 | 26 |
| Manufacturing | 52 | 48 |
| Services etc. | 88 | 12 |
Again in manufacturing, the share of vertical investments is highest in both the lowest-income country and the highest-income country, which is consistent with Figure 5.4.5. This again suggests that the type of investment is heavily dependent on the parent company’s sector. Moreover, a diversity of matters specific to the manufacturing sector seem to be important in selecting the investment country. On the one hand, the reduction of production costs and greater control in the chain seem to be key; on the other hand, matters such as the accumulation of knowledge and expertise also seem to play an important role for investments in high-income countries, for example.
Investment and trade: complementary or substitutable?
The large share of horizontal investments, which involve the parent company carrying out the same activity as the Dutch subsidiary, raises the much-discussed question within literature whether investment and trade are complementary or in fact substitutes. Figure 5.4.8 shows the exports status of Dutch-owned multinationals per type of investment in 2019. This involves enterprises that not only have a subsidiary abroad, but also export goods to foreign countries, irrespective of whether these exports go to the subsidiary’s country. The export status distinguishes between perennial exporters, intermittent exporters and non-exporters. Enterprises are considered perennial exporters if they reported at least three years of goods exports in a four-year period. Enterprises are considered intermittent exporters if they reported at least one and at most two years of goods exports in a four-year period. Needless to say that enterprises that do not export are considered to be non-exporters.
Among those enterprises investing horizontally, the relatively high share of non-exporters is notable (40%). Conversely, among enterprises investing vertically, we see that the majority of enterprises exported goods on a perennial basis (88%). We see that the share of intermittent exporters is lowest in both investment types.
Although large enterprises will often participate in both international trade and investment, the relatively high share of non-exporters among horizontal investment could be an indication that horizontal investment may be a substitute for exports. When it comes to vertical investment, exports and investments actually seem more likely to go hand-in-hand, with intermediate goods being traded between different countries in the value chain. It should be noted that this section focuses on goods exports and not on service exports. Enterprises that do not export goods, may in fact be exporting services.
| Type | Intermittent | Non-exporter | Perennial |
|---|---|---|---|
| Horizontal FDI | 16 | 40 | 43 |
| Vertical FDI | 6 | 6 | 88 |
Specifically for the US, China and India, a relatively similar picture can be seen on average for all sectors to that shown in Figure 5.4.8. The majority of enterprises investing vertically in these countries are also perennial exporters.
Looking in more detail at the manufacturing sector, we see that enterprises that invest vertically in these countries are also fully perennial exporters. For the most part, enterprises in the manufacturing sector that invest horizontally in these countries are also perennial exporters, deviating from the average across all sectors. Again, in line with scientific literature, this is an indication that the parent company’s industry has an impact on an enterprise’s investment choice (Demir & Sayek, 2008) as well as on whether or not to trade complementary to investing. More in-depth analyses will therefore be needed to resolve with more certainty the question of whether investing is a substitute for or complementary to trading.
5.5References
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Noten
Given that throughput via SPEs makes no contribution to the real economy, SPEs are disregarded in OECD’s global figures. Moreover, throughput also occurs via holding companies and non-financial enterprises, meaning that not all of these investments add value to the real economy either.
Internationally trading enterprises are divided into enterprises which exclusively import goods and/or services, those which exclusively export goods and/or services, and two-way traders of goods and/or services. This definition does not use a minimum threshold to filter out small traders.
Up to reporting year 2019, the OFATS only covered foreign direct investment outside the EU.
The standard business classification (SBI) is the Dutch hierarchical classification of economic activities which has been used by CBS since 2008 to classify business units by their main activity.
There are some enterprise groups of which the SBI cannot be determined, as a result of which approximately 15% of subsidiaries are not included in the analyses when split into types of investment.
The Electricity, Water and Construction sectors and Services sectors comprise an amalgamation of sections D to F and H to T of the Standard Business Classification, respectively.
Tanzania had a low-income status in 2019. On 1 July 2020, the World Bank announced that Tanzania had changed income groups, from a low-income status to a lower-middle-income status.