European Union: Framework Conditions For Chinese Investments In Europe

Last Updated: 3 October 2008
Article by Matthias Schroeder

This article was first published in "Hamburg Summit Special Edition 2008" of the Magazine "China Contact", August 2008 edition

The flow of foreign investments into the PRC remains strong. In 2007, 37,888 Foreign Invested Enterprises were established in the PRC and brought USD 82.658 billion into the country1. However, investments going into the opposite direction, i.e. from the PRC to Europe, did not show a clear trend. Every now and again major Chinese projects are discussed. Most recently it became public that the telecommunications provider Huawei Technologies Co., Ltd. intends to invest several millions in an "Innovation – Lab" in Europe, possibly in Darmstadt, Germany. Generally speaking, total investments from the PRC to the EU amount to only a fraction of the investments going in the opposite direction.

When drawing comparisons to China, it seems reasonable to consider Europe as the comparable economic unit instead of the individual European countries. As far as geographic size is concerned, the PRC (approx. 9,5 million km2) is more similar to the European continent (approx. 10 million km2 – only approx. 4,4 million km2 thereof are attributable to the EU-member states) than to any individual European country.

The essentially open borders, the common currency, and the modern high-speed train and motorway network within Europe accelerate the smooth flow of goods and services. The opening-up of this economic area offers sound development opportunities for enterprises which are not yet represented in Europe. Furthermore, with a commodity and product market volume of USD 14 trillion, 2 the European market is larger than both, the Chinese market and the US-American market. Moreover, Europe has major natural and technological resources as well as huge human resources. Europe is still a Global Player in the field of innovation and scientific production.

However, irrespective of these considerations one must not forget that Europe is an entity of 27 different states (the European Union, "EU"), each with different interests and needs. In fact, the EU has 23 different official languages.

It may be true that any truly global enterprise must have a location in Europe, but any investment decision should be governed by the strength and powers of a certain region or a certain state within Europe. Please find in the following some cornerstones of the framework conditions for an investment in Europe. These cornerstones characterize Europe, while they also characterize European countries respectively.

1. Administrative environment

The administrative environment includes provisions concerning the establishment of an enterprise. Even though administrative regulations exist, the European states actively seek to reduce barriers to establishing enterprises. Thus, in the World Bank's ranking concerning the facilitation of business activities,3 10 European states, including Germany, are among the first 20 states. Germany, for instance, has introduced that publication of registration of a company may be processed electronically instead of using print media and Finland has reduced the minimum capital for the establishment of a company by almost 70% in recent years.

Investors from the PRC should be relieved to know of the simplified conditions promoting business activities in Europe. According to the statistics of the World Bank for the establishment of an enterprise, one must pass nine procedural steps in Germany requiring approximately eighteen days. In comparison, one must pass thirteen procedural steps in the PRC, requiring thirty-five days. With a few exceptions, the formation procedures in Europe are significantly easier and more transparent than in the PRC. Admittedly, the different languages can be a concern, because in the European states the formation formalities have to be carried out – in most cases – in the language of the country. Often, English is not an option.

2. Personnel

While labour market regulations differ from one European state to another, they remain comparable. However, in principle these labour market regulations differ markedly from those in the USA. In many European countries the minimum wage is perceived as relatively high. A more accurate conclusion emerges when viewing the minimum wage in proportion to the value added by each employee. When taking this into account, the minimum wage prevailing in Europe is not high in international comparison.

Many governments in Europe try to reach a balance between labour market flexibility and job stability. This frequently leads to a strongly regulated labour market. The majority of European states have national laws concerning paid vacation and strong protection against unfair dismissal. This regulatory framework impacts the employment costs in Europe. In European comparison, Germany is not among the most flexible labour markets. The ancillary wage costs amount to 19% of the wage, and the costs incurred by a notice of dismissal is estimated to amount to 69 weekly wages. However, there are also states in Europe which have more flexible labour markets. For example, according to World Bank statistics, Denmark's labour market is among the 10 most flexible in the world.4

For highly qualified and highly productive employees, minimum wage is, in the end, irrelevant. However, strict legislation makes the hiring and dismissal of employees difficult. While on the one hand, emerging countries and developing countries increase their labour standards (e.g. the strict employment contract law of the PRC, which became effective on the 1 January 2008), developed countries are finding ways to increase the flexibility of their labour markets in response to globalization.

The wage and salary level is not uniform in Europe. As a result of the last two EU-enlargements, a new range of cost-efficiency ratios for enterprises in Europe was born; these ratios range from low-wage countries to high-wage/high-quality countries. There are regions in Europe with a wage level comparable to Brazil that coexists with regions with a wage level exceeding the level of the USA. Nevertheless, also the European countries with the highest wage level in the world are competitive. This is because high wages are accompanied by high quality. Therefore, some countries with high wage costs enjoy, at the same time, a relatively low unemployment rate.

3. Taxes

The tax rates for the taxation of corporate profits are relatively low in Europe and vary between the individual countries. Since 1993 the tax rates in Europe, in part, have dropped dramatically due to the interstate competition regarding investments. As a latecomer, the Federal Republic of Germany will reduce its corporate income tax rate from 25% to 15%, effective 1 January 2009.

In most cases, the corporate income tax rate is not the only tax. Capital gains tax, income tax and trade tax also may apply. This increases the tax burden of enterprises or individuals. In view of the PRC former corporate tax rate of 33% for Chinese companies and the new corporate tax rate of 25% (since 1 January 2008), Chinese investors will be pleasantly surprised to find a lower tax rate in Europe. However, investors should note that on account of other taxes the actual burden will often exceed 25%. The procedures concerning the payment of taxes are not really easy in any country and the tax systems in Europe are relatively complex. But Chinese enterprises are accustomed to dedicating an extensive amount of time implementing mandatory tax reporting procedures. In some European countries, including Germany, electronic tax filing has been introduced to ease the tax filing burden on enterprises.

4. Environment and sustainable development

Reliable electricity supply is indispensable for many investors. Europe has an excellent electricity network, and power failures are very rare. The protection of Europe's energy supply and the preparation for the post-oil era are important issues in Europe. Although the European countries were hit by the increase of electricity prices, they did not suffer to the extent that many other countries did. Energy intense industries, like the high-tech and software industry, will find Europe to be a suitable location on account of its energy safety.

Enterprises in Europe direct their attention increasingly to the emission of greenhouse gases. The EU actively supports green technologies aimed at reducing global warming. All member states of the EU agreed to significantly reduce the emission of greenhouse gases. The fifteen core countries of the EU have the lowest CO2-emission per unit of production worldwide.

5. Enforcement of contractual claims

The legal certainty and the efficient enforcement of the law are important to any investment decision since investors recoil from countries where they are not sure their agreements will be enforced. In the PRC and many other countries, the legal system and reliable enforcement of legal claims are in the initial stages of development. This is because a claimant traditionally relied on extra-judicial solutions, like his or her own network, instead of the court system. However, in most European countries the court system is well developed and able to enforce claims without respect to a claimant's standing. Differences and exceptions exist here also. For example, in Italy the settlement of a claim by a court takes on average 1,210 days, while in most other countries the proceedings are considerably shorter; in Germany, the complete action takes on average 394 days. In Slovenia, the plaintiff may demand up to EUR 5,000 compensation from the state if the proceedings last too long due to the inefficiency of the court.

In general, the enforcement of the law is very good. Among the ten countries with the most efficient legal systems, six are European countries; and among the ten countries with the lowest costs for the prosecution of an action, five are European countries and include Germany.

6. Promotion and Establishment of Chinese investments

Since countries in Europe compete, even with each other, each country has its own method of promoting foreign investment. Some have set up agencies that promote investment, such as e.g. the "Invest in France Agency" or the "Invest in Germany". Both foreign and domestic investors can profit from such support programmes. The German agency provides all types of support to investors.

The German government supports the formation of enterprises irrespective of whether they are established and set up by foreigners or German nationals. The formation can, depending on the size of the company, be supported by an amount of up to 50% of the investment sum. In addition to the financial support, the investor also has the possibility of obtaining gratuitous advice regarding the formation of the company or the set-up of the business.

The individual federal states have set up business development agencies that provide investors with gratuitous information e.g.: "Invest in Bavaria" for Bavaria, "Berlin Partner GmbH" for Berlin, and "Hessen Agentur" for Hesse.

The Federal Ministry of Finance and Technology provides an internet database that summarizes all relevant support opportunities. In general, Germany does not promote a one-size-fits-all method of supporting foreign investments; therefore, state subsidies need to be individually applied for at a bank.

The state-operated Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation, "KfW") also offers a number of subsidies including subsidized loans.

Subsidies are primarily granted for new technologies and ecologically beneficial or energy-saving production methods as well as investments in regions lacking an extensive infrastructure.

Under programmes, such as "KfW Startgeld" (KfW Start Money), "Kapital für Gründung" (Capital for Formation), "Kapital für Wachstum" (Capital for Growth), "Unternehmerkredit" (Entrepreneur's Credit), "Mikrodarlehen" (Micro-Loan), ERP (European Recovery Program), Umwelt- und Energiesparprogramm (Environmental and Energy Saving Programme), ERP Regionalförderprogramm (Regional Support Programme), PRO INNO II, NEMO, and other German and European support programmes special loans and subsidies can be obtained. Due to the variety of available programmes, it is advisable to obtain comprehensive information about all programs within the scope of the planned investment.

As a rule, these programmes are available to German and foreign investors. There are hardly any support programs exclusively available to foreign enterprises. However, the support an investor receives when selecting the suitable support programme certainly constitutes an efficient support of foreign investments. On the local level, minor support for the establishment of companies by foreign investors may be occasionally found.

Concluding it may be stated that the European Union is making new headway in being a prime business destination for foreign investors.

Footnotes

1. Data derived from the website operated by the Chinese Finance Ministry http://www.fdi.org.cn/pub/FDI_EN/Statistics/FDIStatistics/ExpressofForeignInvestment/t20080122_890.82.htm

2. Invest in Germany and Invest in France Agency: The European Attractiveness Scoreboard (2007), to be found on www.invest-in-germany.com

3. The International Bank for Reconstruction and Development/The World Bank: Doing Business 2008, ISPB 978-0-8213-7231-9

4. Doing Business 2008, page 117

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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