ZEW: Country Index of Family Businesses - Germany's economic robustness only a perceived strength
Stuttgart, 21.01.2013

Country Index of Family Businesses - Germany's economic robustness only a perceived strength

The best location for family businesses is Switzerland, Germany is only in midfield.

The countries in Europe as well as the United States that offer the best conditions for family businesses, have one thing in common: They are the smaller countries. The best results come from Switzerland. "Small also means being adaptable and willing to change," said Professor Dr. Dr. hc Brun-Hagen Hennerkes, Director of the Foundation for Family Businesses. For the fourth time, the Centre for European Economic Policy (ZEW) in Mannheim was given the task of finding out the countries in which it is particularly worthwhile to invest.

"For Germany, from the perspective of the family business, there is no room for complacency," warned Hennerkes. "Our country is clearly inferior to 10 others as a good investment location for family businesses, and in being ranked in 11th position only managed to rank in midfield. In contrast to other countries, this shows that the economic robustness of Germany is often only a perceived strength". This is the upshot of the comparison of location conditions that the Foundation for Family Businesses presented in the 4th edition of the study.

The "Country Index of Family Businesses" is unique in its focus on the location factors that are important for family businesses. Five complex composite indices have been incorporated in the study since 2006: "taxes", "labor costs, productivity, human capital", "regulation", "finance" and "public infrastructure". The present Country Index examines an additional field, in which the latest developments worry many family businesses: energy costs and security of supply.

The country index is a compass for investment decisions, ie, for the question of where, in case of doubt, should new jobs be created.

Taxation as a weak area in Germany
Taxes prove to be one of the biggest weaknesses of Germany in an international comparison. Germany ranks only 13th from 18 countries. Concerning the complexity of the tax system Germany reached only 14th place. A medium sized company requires an average of 221 hours of work in this country to do the paperwork for its tax and duty obligations - not including the work of a tax consultant. Two years ago this paperwprk took only about 200 hours. In Switzerland about 63 hours are required.

The inheritance tax remains to be a serious disadvantage for German family businesses. "This is particularly evident since the Federal Finance Court, in a submission to the Federal Constitutional Court, brought the sparing of business assets into question," noted Hennerkes: “Demands for a tightening of the inheritance tax or the revival of the property tax are currently met with somewhat open ears. The country index shows how much those taxes can drag an industrial location down."

An example is Spain: To stabilize its now desperate national budget situation, the government has temporarily introduced the return of the private wealth tax and has therefore fallen five places in the overall ranking. Ireland, compared to 2010, also slipped by five places in the rankings. Ireland, due to the financial and banking crisis, introduced a surcharge on income tax and simultaneously drastically increased the interest rate on withholding tax and aggrivated the inheritance tax.

Seven countries (Luxembourg, Austria, Sweden, Switzerland, Poland, the Slovak Republic and the Czech Republic) waive taxes on inheritance. Others grant broad tax exemptions for close relatives such as spouse or children.

Germany, in terms of taxes, was not able to overhaul any other country. In absolute terms, the tax burden in Germany has slightly risen in comparison to the index of 2010, which is due to the increase in average collection rates under the business tax and property tax. "Reform backlog gets its revenge. Neighbors such as the Netherlands or Switzerland, on the other hand, compared to 2006, have gone past Germany", said study author Dr. Friedrich Heinemann from the ZEW. "The discussion about property taxes has already gone in the wrong direction. We should not also commit ourselves to a denial of reality à la France."

Labor costs unsatisfactory, financing still good
Germany only ranked 15th in terms of labor costs, productivity and human capital, in any case, one rank better than in 2010. "The improvement is mainly due to a more favorable result in the latest PISA study and a slightly more favorable position in terms of labor costs," reported Heinemann.

In terms of finance Germany fares much better: Regarding the question of how well family businesses manage to procure the funds required for daily business activities and investing activities, Germany reached 7th place. It occupies the same ranking in the quality of public infrastructure.

Regulation remains the German achilles heel
Germany got its worst result in regulation, a field that especially concerns family businesses. When the obstacles are too big, the strengths of family businesses such as flexibility and innovation are inhibited. Germany ranks in position 16 out of a total of 18 countries and is therefore still among the worst performers, although it has improved by one place compared to 2010.

Regulation is the Achilles heel of the Germans. Top countries such as Denmark and Finland come to the labor market with much less regulation, in terms of co-determination and collective bargaining. "Scandinavia could be a role model in this regard for Germany, particularly because these countries do not promote social indifference", argued Heinemann. Germany is the only surveyed country, where workers in private companies make up to half the members of the Supervisory Board. In other countries, at best, one third parity is the rule. In the U.S., the UK, Switzerland, Belgium, Ireland, Italy and Spain, there are no such legal requirements regarding the make-up of the organs of a company.

Energy expensive - but still safe
The field “energy” was examined for the first time in the Country Index. Germany was ranked in 13th position here, at the end of a crowded midfield. This unfavorable ranking is mainly due to high electricity and energy costs. In regard to the reliability of energy imports, Germany scored average, in terms of the reliability of power supply Germany achieved very good results. "Indicators of growing risks were indicated by the increasing frequency of intervention required for stabilizing the power grid," said Heinemann: "As a high price location Germany can not afford worsening security of supply," he said.

The non-profit Foundation for Family Businesses has three main objectives: the promotion of exchange between family-run businesses, supporting research activities and institutions that deal with this particular business type, and improving the perception of the family business in politics and the general public. In addition, the Foundation is the contact for policy makers to address the specific concerns of this type of business in legal, tax and economic policy issues.

For more information:

Hartmut Kistenfeger

Head of Communications and Programs

Stiftung Familienunternehmen
Prinzregentenstraße 50, D-80538 Munich

Phone: +49 (0) 89 / 12 76 400 06
Fax: +49 (0) 89 / 12 76 400 09

E-Mail: kistenfeger(at)familienunternehmen.de
Internet: www.familienunternehmen.de

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