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. The interactive chart (German) shows the comparable data.

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 current rankings are led by Switzerland, followed by the United Kingdom and the United States. France, Spain and Italy are at the bottom of the rankings.The main reasons for Germany’s slide from twelfth to sixteenth place is a significant loss of tax competitiveness.

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

“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.

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:

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, irrespective of political tensions and concerns about democracy and the rule of law, recent years have seen Turkey, Russia and China expand their attractiveness as business locations.

The study ranks Russia in first place, followed by Turkey and China. 

Russia was able to expand its position as the most attractive business location among the most important emerging markets. Family businesses there have access to well-trained workers and systems governing taxation, regulation and energy costs are favourable. However, Russia’s greatest weakness as a location continues to be its institutions, whose autocratic tendencies result in the country being rated second worst in this category. Russia also rates poorly when it comes to the rule of law and property rights.

The situation is similar in Turkey, which has done a great deal in recent years to become more attractive for investors and local family businesses. Turkey’s tax regulations are favourable and it features both a liberal regulatory environment and well-trained workers. Yet as in Russia, institutional conditions are Turkey’s greatest weakness.

China has likewise improved its competitiveness. China’s leaders take rigorous action when it comes to crime and corruption, and financing conditions are good. The clearest locational weakness here is the labour market: Wages are high in China, but its productivity is comparatively low, and there are deficits in the educational levels of its workers.

South Africa registered the most negative development. “This is the lingering result of the nine years of Jacob Zuma’s presidency, which lasted until early 2018. It severely compromised the trust of international investors in South Africa,” says Prof. Friedrich Heinemann, research area head at the Centre for European Economic Research (ZEW) and author of the study. South Africa’s point values sank significantly in three of seven areas considered in the Country Index. At the bottom of the list is Brazil. Its greatest weaknesses are its comparatively restrictive regulatory environment and its inadequate infrastructure.

The “Country Index for Family Businesses – Emerging Markets” also highlights the need for reforms in Germany. According to the study, “competition in the emerging economies is increasing steadily when it comes to attracting family businesses to establish facilities there.” The regulatory environment is developing in a business-friendly direction and state control of the markets is generally declining. This poses a remarkable contrast to the strongly increasing tendency in German economic policy to regulate and intervene.”