Europe is more attractive than ever to Japanese investors, and post-pandemic era looks even better
CO-AUTHOR
Pirouzan Parvine
Partner, Corporate M&A, Head of Europe Manufacturing
Dentons
CO-AUTHOR
Takura Kawai
Partner, Head of Japan Desk EMEA
Dentons
Europe is the third most popular region for expansion (including through M&A) for Japanese investors, after Asia and North America. In the past 20 years, the volume of investment from Japan has grown tenfold to reach US$73 billion before the pandemic. Many of these investments have been in the industrial and technology sectors. The view from Japan is that Europe is a stable region with mature markets and infrastructure, but has less dynamic growth potential than some other regions of the world (which in turn sometimes have less political stability and/or less mature markets).
A closer look at Europe shows that certain parts of Europe do enjoy strong and steady economic growth, notably Central and Eastern Europe (CEE). The best example is Poland, the fifth largest country in the European Union by population, and a key trade partner for Germany. The Polish economy has shown strong resilience even during the pandemic. In the post-pandemic era, other countries may also become more attractive to Japanese investors, including more mature markets. Growth predictions for France, for example, are substantially higher than what it has experienced since the end of the 1970s.
Japanese investors will therefore have a choice of several interesting investment options in Europe in the post- pandemic era. Here is a selection of key legal topics to bear in mind when preparing an investment in Europe and making a choice of location.
Key benefits available throughout the European Union
The EU single market provides a series of legal benefits in any EU country where a Japanese company may choose to invest. The first one is equal treatment. For example, if an investment is made in Spain or Poland through a company incorporated in those countries, the investor has the same rights and obligations as those of a French company in a French public procurement process. Similarly, an EU trademark will be protected in each member state and the company’s products can be marketed and sold without regulatory or custom barriers within the single market. For certain sectors under heavy regulatory scrutiny – such as financial services – once a company is authorized in a given EU country it can then easily apply to provide the same services across the EU without the need to re-submit applications to every other EU member state.
Leveraging competition between EU countries to negotiate the best possible investment package
A single market does not mean a uniform offering to foreign investors. Firstly, terms and conditions of business do vary from one EU country to another. Mandatory payments such as corporate income tax, value added tax and social security payments are very different from one country to another. Beyond these obvious differences, each country can provide many exceptions, tax holidays and deductibles that a seemingly heavily taxed country may prove in fact to be more advantageous than one with lower headline tax rates.
More importantly, in order to attract manufacturing jobs or boost depressed economic regions, most EU member states offer grants and incentives. A Japanese investor may therefore use the leverage of its investment project to optimize its plant plans (in terms of plant location, land prices, road, access, utilities connections, etc.) and/or lower its capital expenditure on the project (using special loans, grants, tax holidays, etc.). For instance, Jaguar Land Rover, Audi and many other recent large investments in Central Europe have led to well-publicized battles between Poland, Hungary, Slovakia and Czech Republic.
Strengths and weaknesses of Central and Eastern European countries when compared to Western Europe
The basic foreign direct investment offering of CEE countries since they joined the EU in 2004 has been structured around a well-educated yet large and affordable labor force, as well as good industrial assets and a proximity to Western Europe. Their historical weaknesses have been corruption, transparency, ease of doing business, fast transport routes and access to the rest of Europe. A little less than 20 years after EU accession, most CEE member states have indeed caught up with the rest of Europe on business ethics, have built important transport and logistics hubs, and can offer generous incentive schemes, which, over time, have increasingly focused on R&D, cleantech and high-end technology in general.
However, success has now caused a shortage of manpower in many of these countries, leading to a slightly more expensive and volatile cost of employment, to the extent that some investors have been forced to abandon their plant extension and/or new investment plans. One additional weakness is that green production has now become a key parameter for investors and manufacturers and their shareholders, but a number of CEE countries have been slow or hesitant with the transition to green energy and still heavily rely on coal as a key source of energy for industrial production. This gap (CEE countries now actively endeavor to reduce) can make investors prefer greener locations in Western Europe.
Strengths and weaknesses of Western European countries when compared to Central and Eastern Europe
Remarkable shifts are happening in Western Europe in terms of attracting foreign direct investment into the technology and industrial sectors. After watching manufacturing jobs shift over the last few decades from Western Europe to Central and Eastern Europe, East Asia, the Indian subcontinent or North Africa, two massive shock waves ̶ the global financial crisis of 2007-8 and the current pandemic ̶ have served as final wake up calls. Countries such as France have started offering incentives for manufacturing repatriation / relocation to Europe. These policies were essentially aimed at medium-sized French companies that had moved production to China.
The pandemic and the sudden consciousness of Europe’s dependency on other regions for vital technology and life sciences goods has now led to a broadening of the target investor group. Larger Western European companies
are being pressed to manufacture as much as possible within the EU. Moreover, wider forms of state aid and incentive programs have multiplied at the EU, state and regional levels. One good example of this is Italy, where regions have the capability to provide aids and incentives in addition to the central government. In addition, we have seen Western Europe governments proactively work to find solutions for large investments in fields such as cleantech that are areas of top priority for them.
Of course, Western European countries such as Germany and France remain very mature investment destinations, with complex tax and social security laws and strong trade unions when compared with CEE countries. Nevertheless, there are and will continue to be plenty of incentives for Western European countries to accommodate Japanese investors so that their investment package becomes more competitive with those of CEE countries. The choice is therefore rich and wide for Japanese investors, and the post-pandemic era seems promising.
The best of the two worlds
Japanese investors may of course benefit from the advantages of being present in two different European locations. This is a typical feature for large industrial groups present in Europe. It is sometimes devised as
such from day one and at other times is part of a post- acquisition strategy. In the latter case however, particular attention needs to be paid to relocation and plant closure conditions and constraints, which may be imposed by local laws or by commitments contained in state aid rules.
All in all, the choice is rich and wide for Japanese investors, and the post-pandemic era looks promising.
__
For more detailed information about each country, especially on the legal aspects of investment, Japanese investors should consult our dedicated website, www.dentons.com/en/find-your-dentons-team/industry-sectors/, as well as seek assistance from our Manufacturing sector group and Japan Desk EMEA.
Published 2021