Internationalisation

Key business conditions for family businesses

Though large family businesses have strong roots in the regions where they arise, most of them operate internationally. That is why business conditions in other countries are of crucial importance to them.

For years now, the Foundation for Family Businesses has commissioned regular studies to examine business conditions from the perspective of family businesses not only in Germany, but also in other key industrialised nations and emerging markets. Carried out by the Ifo Institute for Economic Research and the Centre for European Economic Research (ZEW), the studies allow conclusions to be drawn about trends in the competition between different economic hubs around the world and about Germany’s long-term competitive situation.

Germany’s position in the competition to attract businesses

Germany is by no means unrivalled as a location for family businesses, as the Country Index for Family Businesses – a comparison of 21 OECD countries based on six different criteria of particular importance to family businesses – reveals. Fifteen of the industrialised countries examined rank better than Germany in this benchmark comparison, with smaller countries of western and northern Europe generally occupying the higher spots in the rankings. They have either led the index since its advent in 2006 (e.g. Switzerland, Finland and Denmark) or have gradually improved their rankings over the course of time (e.g. the Netherlands and the Czech Republic).

The Czech Republic overtook Germany in the business conditions rankings for the first time in the 2016 Country Index for Family Businesses. Its better placement is mainly attributable to its far lower tax burden and more competitive energy prices.

The six criteria examined and compared were: taxes; labour costs, productivity and human capital; regulation; financing; public infrastructure; and energy.

Whereas Germany has made improvements in the areas of financing and regulation since the first study, it has stagnated when it comes to taxes, labour costs, productivity and human capital, infrastructure, and energy. In some cases, it fares even worse than it did in 2014.

“Our neighbours are more agile when it comes to tax policy. That means our fiscal competitiveness is being eroded. What is more, the revisions already made to inheritance tax legislation could cause the country to slip even further down the tax rankings.”

Prof. Friedrich Heinemann, research area head at the Centre for European Economic Research (ZEW) and author of the study Country Index for Family Businesses

An analysis of international tax competition also revealed that Germany’s federal government needs to act. Whereas other countries regularly adapt their corporate taxation regimes in response to competitive pressure from abroad, Germany has made no changes since 2008.

In the opinion of the Foundation for Family Businesses, tax cuts abroad are good news only at first glance. “On the whole, family businesses risk losing out in the international competition to attract businesses with lower taxes,” says Prof. Brun-Hagen Hennerkes, Executive Board Chairman at the Foundation for Family Businesses, and he called on the federal government to counter this trend by lowering taxes.

Investment policies of family businesses

The investment policies of companies are another indicator of how attractive a location is for business. In 2017, the Ifo Institute for Economic Research surveyed the investment policies of 1,500 family and non-family businesses as part of the Annual Monitor of the Foundation for Family Businesses.

According to the Annual Monitor survey, family businesses remain firm in their commitment to Germany as an economic hub. Of the family businesses surveyed, 51.3 percent plan to maintain their investment at current levels. However, only 36.3 percent said they intended to increase the proportion of the funds they invest in Germany during the next few years. By contrast, 51.2 percent of these businesses did increase their domestic investment during the previous five years.

The survey suggests that capacity is increasingly being expanded abroad, while investment in Germany tends to be focused on replacing existing facilities. However, for the overwhelming majority of companies surveyed (95.8 percent), this investment abroad does not go hand in hand with the transfer of existing jobs away from Germany.

According to family businesses, negative factors influencing investment in Germany included wage costs (35.3 percent) as well as economic policy and tax parameters (29.6 percent and 26.8 percent respectively). When asked what the federal government should do to increase domestic investment, 65.1 percent of the family and non-family businesses surveyed ranked ‘reducing red tape’ as their top priority.

Brexit – an exceptional situation

The UK’s decision to leave the European Union – known colloquially as Brexit – will have a strong negative impact on both Germany and the EU. One of the analyses carried out as part of the Country Index for Family Businesses examined to what extent selected EU Member States are likely to be affected by Brexit, especially as regards their suitability as locations for family businesses.

Some sectors of German industry will have to brace themselves for a substantial drop in revenues following Brexit. Overall, the UK’s impending departure will affect German foreign trade less than it will other economies, especially Germany’s neighbours Belgium, Switzerland and the Netherlands. In Germany, the pharmaceutical industry is the sector that will suffer the most severe impact, owing to its high level of dependence on exports. But several areas of the transport industry – such as the aerospace and railway construction sectors – likewise appear to be vulnerable because of their high exposure to import risks. The experts also expect Germany to encounter difficulties with computers, electronic and optical products as well as in the textile and clothing industries.

Degree of impact from Brexit:

Foreign-trade risk index

A survey of 1,250 German companies conducted by the Foundation for Family Businesses came to the conclusion that the corporate tax reductions expected in the UK following Brexit are unlikely to make up for the losses caused by lack of access to the single European market. Of the family businesses surveyed, 26.5 percent with commercial links to the UK answered “no” when asked whether British tax reforms and reductions could offset the potential disadvantages of Brexit. The share responding in the negative was as high as 37.1 percent among large companies with more than 250 employees. Only 10.8 percent of the family businesses surveyed said they thought tax reform could make up for the disadvantages of Brexit. That figure rose to 14.7 percent with companies employing more than 250 people.

A comparison of emerging markets

Industrialised countries are not the only locations of potential interest to family businesses. That is why the Foundation for Family Businesses examined six emerging markets in terms of their suitability as family-business locations. The Country Index for Family Businesses comes to the conclusion that Turkey and Russia offer family businesses the most attractive conditions among major emerging markets. However, in the light of negative constitutional developments in these two countries, China is beginning to catch up.

Overall, Turkey performed better than Russia. China took third place, followed by Mexico, India and Brazil. Owing to a lack of data, South Africa did not figure in the rankings. The country index was determined on the basis of six criteria: taxes, labour, regulation, financing, infrastructure and institutions. The higher the score, the better the business conditions.

Subindex TR RUS CHN MEX IND BR ZA
Taxes 93,67 82,05 47,61 45,77 41,52 68,62 78,18
Labour 58,65 59,74 26,15 51,28 41,75 30,06 n. a.
Regulation 67,55 76,02 49,97 88,86 41,98 24,26 47,48
Financing 42,39 42,28 68,57 77,69 29,33 22,71 36,05
Infrastructure 60,81 76,82 39,01 26,28 45,11 50,28 41,23
Institutions 55,27 29,11 72,00 8,30 56,43 44,79 92,85
Source: The Foundation for Family Businesses
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