Executive Summary

The Internationalisation Monitor describes trends in internationalisation and the consequences thereof for the Dutch economy and society. It is published quarterly as part of the Globalisation programme at Statistics Netherlands (CBS), which is commissioned by the Dutch Ministry of Foreign Affairs.

In this edition, we focus on the financial side of globalisation. The Netherlands has a strong and internationally oriented economy. Internationalisation has financial aspects, such as the necessary access to finance in order to start operating as an export company. Access to financial resources is partly dependent on the financial health of companies. More productive companies are better able to start exporting than less productive companies, but the effects on profit are less well-known.

The Dutch government provides a number of tax arrangements to support the private sector in the international context; for example, to stimulate innovation activities such as research and development (R&D). The downside of such provisions is that they may be used for tax structuring purposes by multinationals. The same applies to bilateral treaties (e.g. on taxation, trade and investment) which make the Netherlands a propitious environment for investments, but which may also support special-purpose vehicles that do not actually invest in the Netherlands but channel their investments to other countries.

Another financial aspect of globalisation is exposure to exchange rate fluctuations. These are likely to affect company value and share prices. Export activities also carry risks; companies can insure themselves against these risks. For high-risk export activities, the Dutch government provides a Public Export Credit Guarantee (PECG). This edition of the Internationalisation Monitor examines these financial aspects of internationalisation in more detail.

Listed below are some of the main findings presented in this edition:

Chapter 1: Profitability of international traders

• On average, Dutch exporters make higher profits than non-exporters. This is mainly due to the fact that they tend to be larger and more productive.
• Despite making higher profits, the profit margins of Dutch exporters remain significantly lower than those of non-exporters.
• Although profit margins tend to be higher for more productive companies, they are also lower for larger companies as the latter have higher expenditure in investment.
• Since exporters are larger in terms of number of employees, pay higher wages and bear higher costs in general when expanding to new markets abroad, they have profit margins that are lower on average than for non-exporters.

Chapter 2: Access to finance and internationalisation

• Entering an export market involves significant costs, which only a select few are able to finance. This is why only the best companies, i.e. the more productive ones, end up as exporters.
• These more productive companies are often relatively more focused on improving and expanding, whether it is improving their own product to be more competitive both domestically and internationally, expanding their workforce by adding more qualified (and therefore highly paid) staff or expanding into new export markets.
• All these activities require sufficient access to funds.
• Whether a company is enjoying sufficient access to finance is often not observable. The information we have is restricted to surveys where firms themselves answer questions about the perceived or actual extent to which they enjoy access to sufficient funds.
• Based on the conclusions of these surveys, a certain image of financially restricted companies has emerged. Symptoms of insufficient access to finance include lower liquidity, higher debt ratios, higher debt financing costs and lower profitability.
• Many contributions in the relevant literature use these insights to compose a measure of access to finance that ranks companies in terms of how well they are able to obtain sufficient funds.
• In this chapter we replicate two of those measures for Dutch firms. We also introduce one of our own, based on various insights from the literature as well as available surveys.
• We conclude that exporters generally enjoy better access to finance than non-exporters. We also notice that exporters constitute a highly heterogeneous group. Perennial exporters, for example, seem to have better access to finance than occasional exporter. Enterprises just starting to export are confronted with financial constraints more often than exporters that have been active for several years.

Chapter 3: Outward foreign investments of firms in the Netherlands

• Cross-border investments are a step only few firms are willing and able to take due to the many risks and costs associated with them.
• Independent small and medium sized companies (SMEs) are far less likely to have foreign investments than large firms.
• Even when SMEs hold investments abroad, they are more likely to be in the form of minority interests.
• More than half of all foreign investments by Dutch firms take place within the European Union.
• Special-purpose enterprises often mainly invest within the European Union as well, albeit not as often. 

Chapter 4: Foreign investments and taxation, investment and trade agreements

• In 2017, the total inward stock of Foreign Direct Investment (FDI) amounted to 4,587 billion euros. Eighty percent was in the form of investments in special-purpose vehicles (SPV). The total outward FDI stock was 5,149 billion euros, of which 71 percent consisted of SPV investments. Outward FDI has grown threefold since 2004, while the share of SPV investments has remained fairly constant since then.
• The Netherlands has signed 142 double taxation agreements, 91 investment treaties and 581 trade agreements bilaterally, ranking it amongst the top in the world.
• In the presence of a double taxation agreement, the share of bilateral SPV investments in total FDI is 6.7 percentage points higher than in its absence.
• Shallow trade agreements that solely focus on removing barriers to trade do not significantly affect the SPV share in total FDI. However, in the presence of deep trade agreements, the SPV share may be up to 17 percentage points higher.
• Bilateral Investment Treaties (BITs) do not seem to significantly affect the share of SPV investments. However, we do observe that for developed non-EU countries, the SPV share is significantly lower in the presence of a BIT. In addition, in the presence of a BIT, the SPV share in total FDI is 7.5 percentage points lower in developed than in developing countries. These results suggest that BITs may be used by SPVs to protect their investments in developing countries.

Chapter 5: The contribution of the Public Export Credit Guarantee to the Dutch economy

• The Public Export Credit Guarantee (PECG) stimulates and safeguards risky export transactions, e.g. when banks lack capacity or when the destination country is unsafe.
• 310 export transactions were covered by a PECG in 2015–2017, accounting for a total value of 6,9 billion euros.
• Civil engineering projects claim the larger share of the PECG (48 percent), followed by ship-building (26 percent) and machine industry (19 percent).
• Dutch companies benefit from the PECG in terms of value added and employment opportunities:
  • 4.5 billion euros was the amount gained in 2015–2017, both by companies that use the PECG directly and by supplying industries
  • Nearly 52 thousand jobs were created in 2015–2017.

Chapter 6: Trade and exchange rate exposure

• The results show that in general, companies located in the Netherlands which innovate benefit from a relatively low tax burden. This holds for both innovation input (investments in R&D) and innovation output (patenting). This suggests that the Dutch tax regime stimulates innovative efforts. An important additional finding is that foreign companies do not pay less tax than other firms and tax payments by foreign firms are not significantly correlated with R&D and patenting activity.
• A comparison between productivity and profit-wage ratio of companies making use of R&D tax incentives and those that do not provides contrasting evidence. Overall, we find that companies making use of these tax incentives have higher labour productivity as well as higher profit wage ratios. This suggests that any additional income derived from increased productivity is not proportionally shared with employees through increased wages.
• This result holds regardless of nationality of ownership, but foreign companies show the highest productivity differential, combined with the highest profit-wage differential. Unless the excess profits are invested locally, this indicates that the contribution to the local economy of foreign companies with tax benefits aimed at innovation is in fact lower than would be expected based on their relative productivity.
• We conclude overall that companies do not seem to use tax incentives aimed at innovation to shift profits to the Netherlands, but it does seem that foreign companies making use of these incentives are able to generate relatively large profits, which are not associated with higher wages of local employees.

Chapter 7: Trade and exchange rate exposure

• Extensive academic research has been done on the effects exchange rate fluctuations have on firm value or the stock return, yielding mixed results.
• An increase in the exchange rate will lead to stronger competition for exporting companies because products will become more expensive abroad.
• For importers, an upward exchange rate is favourable because less of the same domestic currency is needed for the same quantity of imported products.
• This innovative research uses a firm-specific effective exchange rate based on monthly data from both import and export data for both the Netherlands and Belgium, enabling a comparative setup for both open economies.
• Dutch companies are more involved in world trade compared to Belgian ones, making them more vulnerable to exchange rate fluctuations as a result.
• Dutch and Belgian firms may react differently to the exchange rate and trade policy actions of the European Union, due to the different level of involvement in world trade.
• Dutch companies are more loyal to their trading partners than Belgian ones, giving them higher exchange rate exposure.
• Importing companies have higher exchange rate exposure because they also engage more in international trade and encounter trade barriers when doing so.
• The European Central Bank (ECB) should realise that even for similar economies such as the Netherlands and Belgium, their respective trade and exchange rate policies may have different results since their focus on international trade may differ significantly.