The Financial Management of Foreign Direct Investment: A Case Study of Dutch Firms Investing in Europe
Westerman, Wim, International Journal of Management
We examine the financial management of seven cases on industry-leading Dutch firms investing in Europe. Our results are as follows. While the internationalisation of the firm is largely fixed before a current investment, quite varying strategic analyses do shape the outline of the actual financial analysis. As financial modelling gets more detailed and diverse over time, the emphasis shifts from accounting to present value selection methods. Financial risks do not always matter that much, but financing aspects receive a place in the process. Organisation and behaviour do not play independent roles, but it matters to nurture culture and communication. The firms' investment patterns found mainly vary as to growth strategies (acquisitions or greenfields), size of the firm, investment size and corporate governance style.
An increasing number of firms grow by investing abroad. Though mostly nearby countries are at stake, investment processes soon become complex. Even so, we still need a framework that reconciles foreign direct investment processes in adjoining countries. Dutch practices in Europe will be used to exemplify such a model. Dutch firms are among the world's main investors and their investments in a changing Europe may be interesting. We use a financial management perspective to examine the processes with seven cases. The research strategy employed and the research objects selected are accounted for in § 2. A comprehensive conceptual model on financial management with European investments is outlined in § 3. Patterns of similarities and differences with the cases are searched for in § 4. The conclusions to the case study are given in § 5. Suggestions to practice and science finally follow in § 6.
2. Research strategy and research objects
The research strategy united the experience of the reporting researcher, a vast literature survey and a multiple case research study. A first research model was largely drawn from the author's involvement with foreign direct investments (FDI's) in foremost Europe. The actual results of the firms dealt with were mostly satisfying, but not always encouraging: some of the firms even went bankrupt. There was much literature about many aspects of FDI processes, which might have been of help to these investors'. However, often either greenfield investments or mergers and acquisitions were studied, whereas a comprehensive analytical financial management perspective was absent. It was felt that research on actual practices would offer deeper and broader knowledge on this matter. Therefore, a process oriented field research approach dominated the research strategy in the years 1999 to 2001.
The field research was framed as a multiple case study. Case research was partly carried out real-time, balancing on the delineation between the research and its context, while the number of variables mounted and information was tapped from various sources [Yin, 1994]. The actual case selection and a small questionnaire added a limited survey character to the mainly qualitative study. The case research was divided into three largely discernable phases. In the preparation phase, the problem statement was formulated and put into a conceptual framework, at the same time practicing with a case of a non-European investment. In the execution phase, the seven cases were studied extensively, largely led by personal contact with a key informant. The conceptual model was filled in during the analysis phase. Patterns were searched for, the model was examined and final remarks were formulated.
European investments mainly occurred in the European Union (EU). The EU had a common market, joint policies on growth, free markets and competitiveness, as well as much influence in Central and Southeast Europe [http://europa.eu.int, 2002]. Local competition was fuelled by corporate law harmonisation, preventive supervision on concentration and decreasing fiscal competition. Liberalisation and deregulation of European banking, the advent of the euro as a single European currency and harmonisation of financial reporting and disclosure came to pass. Confirming international trends, Dutch firms' mergers and acquisitions, peaking in 2000, had a much larger volume than their greenfields [Myiake and Sass, 2000; http://www.dnb.nl, 2002]. In the changing and growing Europe, many industries were attractive to Dutch investors. Actual cases were reasonably spread over these sectors and concerned diverse European countries.
The Dutch firms to be studied had to strive for European market development. This excluded global firms such as Unilever and Philips, as well as primarily cost and tax driven investors. In order to be relevant, financial considerations had to play a role in the investment selection. Only expert firms, investing at least three times in Europe between 1995 and 2000, were singled out. A balance between greenfields and acquisitions, having different speed of market development, was struck. Other characteristics that were assessed included both the size of the firm and the size of the capital investment, the scope of an investor: the number of countries to be invested in at once, the organisation of the relevant financial function and the location of corporate head-offices as a proxy for different investment styles (even in a small country as The Netherlands actually is). A so-called top 40 of corporate Dutch investors was drawn up from different sources. Seven firms were selected ultimately.
The first case came from a nutrition firm with a success story: Numico. The Pan-European merge of the Dutch Nutricia with the Milupa business of the German Altana firm made both subsist. The temporary work firm Randstad did a large greenfield investment in Italy along with a major German acquisition. NNZ was a reputed smaller regional grocery firm. Having made a major acquisition before, she was active at the time as well. Dredging firm Boskalis allowed studying a Scandinavian takeover. A co-steering strategy and business development function drew attention here. Contacts could be most frequent at the close by small machine builder Bollegraaf that was conquering Europe (e.g. Spain) with her greenfields. The mid-sized coffee roaster Drie Mollen, located in another part of The Netherlands, had just concluded a takeover in Switzerland. The fish and meat chain firm Nutreco employed lasting "M&A" functions. Targeted European businesses included the vast Norsk Hydro Seafood.
3. Conceptual framework
Our analytical framework treats financial management processes with European investments. Financial management is limited to corporate capital budgeting and corresponding treasury management issues. European investments primarily refer to foreign direct investments in the European Union and the European Free Trade Organisation (EFTA). The terminology used takes a broad process approach. Words such as procedure, approach and activity fit with this.
The first major study on (even foreign) direct investment processes was written by Aharoni . He focused on FDI decision processes, not on the final decision-making. Bower  analysed the resource allocation process, covering more than just financial investment selection. He delineates intellectual activities of perception, analysis and choice (decision-making) from social processes when executing phrased strategies (organisational behaviour). This distinction leads us to a conceptual model akin to a two-sided coin. Wissema  discerns strategic evaluation from financial evaluation. Financial risk and financing aspects may also be singled out in FDI processes [Buckley, 1996]. The front of the model culminates in the capital investment selection. The back is on organisational and behavioural aspects that shape FDI-processes too [Tomkins, 1991]. External to the model are firm characteristics and environmental characteristics that show up in various checklists [cf: Pike and Neale, 1993].
We follow the good-old Dutch business administration [Bouma, 1982] when aligning means and goals in a hierarchical chain of relations. The final goal of any investment is to ensure the financial viability of the firm. The four capstones of financial management processes of FDI in Europe include strategic investment analysis, capital investment selection, financial risk and investment financing, as well as organisation and behaviour. Each of these is assessed both separately and in conjunction as to feasibility. Strategic investment considerations (means) align to ways of capital investment selection (goals), taking financial risk and investment financing aspects (derived means) into account. Organisational and behavioural aspects form boundary conditions of the investment process, but are also strived for (as goals) and employed (as means) on their own (coherent) merits. Figure 1 gives the resulting model.
4. Case study results
Elaborating on the strategic investment analysis above, the internationalisation of the firm is in the sample largely resolved before a new investment starts. Our sample of European leaders is biased towards exploiters of market power advantages that simultaneously capitalise on cost advantages2 [Porter, 199O]. Almost all of the firms invest in European markets that are still mainly local. Local market conditions lead them to either greenfields or (rather) acquisitions. Acquisitions may become platforms for greenfield courses, though. Industry customs determine percentages of ownership issues. Europe is really a regional bloc [Rugman, 2003], but scopes differ when penetrating local markets. Concrete investment motives are intrinsic to a firm's ability to exploit her own advantages. "Pure" acquirers Numico, NNZ, Boskalis, Drie Mollen and Nutreco pursue growth by utilising fit and synergy, whereas "greenfielders" Randstad and Bollegraaf aim to grow by building on their capacities.
The internationalisation of the firm affects the use of strategic techniques, which are assimilated in private checklists. Four groups of strategic techniques prevail [Mintzberg and Lampel, 1999]. Design techniques, such as SWOT analyses, dominate greenfields. Planning techniques, including brainstorming, benchmarking and quantified plans, or portfolio techniques, such as the famous BCG matrix, dominate acquisitions. Foremost the large firms Numico, Randstad and Nutreco tend to incline towards strategic value management techniques that focus on value chains and competencies. Large investments are just little more assessed than small investments. Anglo-Saxon oriented firms (notably Nutreco and Boskalis) put slightly more weight on strategic value management techniques than Rhineland oriented firms (notably NNZ, Bollegraaf and Drie Mollen). Still, this may be a matter of time.
Next, as to capital investment analysis, we find that large firms amply use financial modelling designs, notably for large investments. Depths and widths of modelling, case specificities of cash flows and discount rates, as well as uses of sensitivity analyses, also depend more or less on sizes of firms and investments. All firms normalise balance sheet, profit and loss and operational cash flow items from a local point of view. Financial cash flows are modelled when financial limitations come up. Financial ratios are routinely calculated, often later being an input for further modelling. Acquirers draw explicit distinctions between stand-alone and synergy effects. Large firms care most for forecast terms and terminal values. All firms apply, albeit with different finesse, investment hurdle rates. Just Anglo-Saxon oriented firms hereby look at country differences, applying capital asset pricing model notions [Buckley, 1996].
All firms use multiple financial investment selection methods [Walsh, 1996; Arzac, 2005]. All firms use accounting methods, including revenues, profit and loss items, price/profit (per share) multiples, cash flows, intrinsic values, stand-alone and synergy values, liquidities and solvencies, returns on sales or investment and payback periods or break-even points. Still, all firms but the small Bollegraaf do prefer discounted cash flow methods1: the net present value method, the internal rate of return method and the flowto-equity method. Shareholder value methods, favoured by the Anglo-Saxon oriented firms, extend these discounting methods with a strategic component [Rappaport, 1986] ora reporting view [Stewart, 1991]. Only acquirers explicitly distinguish between standalone and synergy values. Greenfielders give less attention to discounting methods than acquirers do. Small firms do not use discounted cash flow methods. Small investments are typically subject to just a few accounting methods.
Furthermore, firms pool corporate finance theory, agency considerations and institutional approaches on financial risk and investment financing [Tempelaar, 1986]. Sampled Dutch firms map and reducefinancial risks with European investments manifold4. They counter business risks with financial history analyses, credit controls, insurance policies, procured guarantees and prudent local conduct. Oddly, just investments in distinct countries at times lower these risks. Outside of notably the euro zone, currency risks are hardly felt. Even if material, these risks may be left unhedged. Larger firms seem to hedge least, probably due to their financial buffers. Smaller investments often require less hedging. European political risks differ a little per regional bloc. If considered to be negative, they are not permitted to be too high. Political risks are felt hard to quantify, but the larger firms do give it a try.
The investment financing is is limited by means of conservative capital structure standards, ruled by debt ratios, interest coverage ratios and at times liquidity ratios partly set by banks. Financing mixes follow pecking orders mitigated by risk, taxes and control considerations. Firms consecutively use up operational cash flows, short-term and longterm credit facilities, possibly asset leases, mezzanine financing and deferred loans or shares. Small firms do not issue shares for investments, just as Rhineland-oriented firms tend not to do this. Customs determine the settlement of liabilities. The sampled firms employ legally allowed structures. Greenfields by definition ask for new structures. The fiscal potential in the host countries is applied properly too, whereby opportunities with greenfields and acquisitions differ mutually. In the sample, the care for financial risks and investment financing is of a more general nature, while the adjusted present value method [Shapiro, 1988] meets little response5.
We finalise our discussion by looking for patterns on investment organisation and behaviour. Organisation is about who does what and how [Simon, 1976; Anthony and Govindarajan, 2004]. Management control is mainly hard with large investments. It is subject to corporate culture and corporate governance style. Except for the project oriented Boskalis, firms evaluate local subsidiaries. Only Nutreco once did post investment audits. The investment activities divide into three parts: idea framing, decision-making (informing, negotiating and binding) and execution. Greenfielding may take more time, but tends to be less structured than acquiring. Informal investment teams cover key corporate functions. Anglo-Saxon oriented firms have "M&A" specialists and may have more clear-cut responsibilities. Firms direct core (financial) processes on their own. However, smaller firms have fewer in-house (financial) specialists and banks, accountants and legalists step in more here. The board of directors does the final decision-making, thereby controlled by the board of commissioners.
Behaviour is about why (not) to do things somehow. Behavioral theory of the firm [Cyert and March, 1963], agency theory [Jensen and Meckling, 1976] and behavioral finance notions [De Bondt and Thaler, 1994] shed light upon investor behaviour rationality. Corporate and personal aspirations levels align and are set high. Investing is all about solving problems, though. It goes stepwise, unbundled and cyclical. Lucid strategic and financial "mapping" is important with large investments. Risks are smoothed away if needed. Corporate cultures affect investment paces. Anglo-Saxon oriented firms resolve on these by themselves. Time pressures are benign. Information gaps are closed by sourcing widely. Anglo-Saxon oriented firms are opportunistic. This also goes for greenfielders. Confidence is built up over time. Personal reputations are quite collective, as financial responsibilities are jointly felt. Here as well as before, culture is linked to communication: acculturation [Grotenhuis, 2001].
A closing balance of our study on financial management of European investments by Dutch firms can now be made up. The internationalisation of the firm sets the outline for an actual investment. The strategic investment feasibility is assessed with checklists. As the financial modelling gets more detailed and diverse, the emphasis shifts from accounting to present value selection methods. The capital investment selection culminates in assessing the financial value creation. Financial risks do not always matter that much. Investment financing aspects receive a place in the financial valuation and later on. Organisational and behavioural aspects usually do not play an independent role, but nurturing culture and communication aspects is important. All in all, financial management of near-by FDI's is about aligning strategy and finance, thereby having regard for structure, culture and communication aspects.
As to content aspects (strategic investment analysis, capital investment analysis, as well as financial risk and investment financing) of our framework, a broad profile matches the cases. The firms make both greenfields and acquisitions in Europe. Investment motives are foremost commercial and stress synergy with the present firm. Strategic techniques are assimilated in checklists used. Profits and cash flows are normalised along private standards and targeted to the local situation. Discount rates are smoothened, but slightly diversified per country. All firms use more than one accounting method. Present value methods are not common, though. A rise of business risks is evaded. Currency risks are hardly felt. Countries with political risks that are too high are evaded. Financial structures are mainly determined by traditional measures. Financing is done with private and bank funds. Liabilities are settled according to local customs. Firms exploit legally allowed structures. The fiscal potential is used properly.
The contextual aspects (organisation and behaviour, including culture and communication) can be summarized as follows. The management control of new businesses is hard. Investments occur in three phases: idea, design and execution. Corporate financial and other officers, mutually sparring and using external help, perform the financial management. The firm herself directs the team tasks. Financial core competencies must be available in-house. When investing, the best for the firm is strived for. Decent manners are united with trade spirit. Division, co-ordination and process agreement effectuate solutions to problems. Rationality and sense align when investing. Limited entrepreneurial risks are accepted. Time pressures are hardly felt. Information shortages are covered. Confidence is created over time. Firms seize their chances disciplined. Personal reputations are not too much at stake.
We turn to content differences in the sample now. Strategic investment analyses, being done with checklists, are subject to growth strategies. As to capital investment selection, variances on depth and breadth of modelling, calculating and weighting financial sensitivities, forecast period and terminal value handling, cash flows and discount rates adjustment, number of selection methods applied and weight of accounting methods compared to discount methods can also be traced to investor size, investment size and governance style. The same goes for financial risk and investment financing aspects in the sample. These vary on significance attached to risks, currency risk hedging, negatively or positively sensing political risks, financing by (deferred loans or) new shares, legal structure development, as well as on fiscal treatments. Geographical factors do have more of an autonomous role here.
We finalise our conclusions with a reference to the context differences found in our case research study. Organisation aspects vary as to manner and degree of investment phasing structuring, overall division of responsibilities, chief financial officer responsibility, presence of specific M&A officers and data collection outsourcing. This is especially due to corporate governance styles and ways of acculturation. The same factors also largely determine the differences in behaviour. These differences concern accuracy of mental framing at an investment, initiating on forwarding a process and style of negotiating away controversies. The relatively low organisational and behavioural variety may be due to sample homogeneity, as the seven Dutch case firms share many corporate and environmental characteristics.
Extending the conclusions now, various recommendations apply here. Financial management of a European investment starts with an apprehension of the internationalisation of the firm. This sets the table for result patterns. Understanding strategic backgrounds will help to develop and correctly apply suitable checklists. Financial management tones must already firmly resonate here. Financial modelling deals with deepening the former, as for stand-alone power and synergy effects, in terms of (semi-) long-term cash flows and discount rates. Proper usage of several selection methods, not inevitably the most difficult ones, will enable multiple financial assessments. Inevitable risks must be taken care of, as well as effects of the financing on financial structures. Also, a solid investment organisation, as well as a (fitting) feeling and a (hard working) mind, will have to accommodate the procedure. The financial management function should as a rule have a co-steering say in an investment process.
If financial management does have a guiding role in the FDI process, the literature should accommodate this more than up to now. Internationalisation aspects are hardly judged scientifically on financial value management merits. Also, connecting links from production strategy to financial valuation should become more apparent. Scientific value management approaches do actually provide for this, but concretisations are too easily left to practitioners. Current firewalls between accounting models and present value models may well be overcome by developing effective and efficient shortcuts.
It is also wise to sort out which capital selection method has to come first under what circumstances. Realigning ambiguous risk classifications will lead to increased coverage of financial risk in capital investment selection. Financing has got to be included in capital investment selection more univocally than the APV method suggests. If not, financial valuation will too often remain fragmented.
Control of FDI processes is a mix of management control, organisational control and task control. Management control during an investment is of higher importance than the literature suggests. There is a need of studying financial activities next to the financial function itself. We singled out several aspects that may guide investor behaviour in a broad sense. We revealed a lot of results, such as on information handling and entrepreneurial attitudes, which ask for further in-depth research. If including a behavioural factor into organisational, strategic and financial aspects, interdependencies and dynamics in processes may be captured well. Our study shows that culture and communication variables may help to unveil neglected aspects of financial management of FDI. Values and norms, knowledge and experience, feel and ratio, sense and phrase, as well as rituals and routines can be key elements to study local differences. This may further insights with FDI processes, especially in the now enlarged EU.
1. The author's personal website, accessible via http://www.rug.nl/fmo, contains a list of references, which can also be supplied on request.
2 This is reflected by the corporate priorities that range from being number 1 in the market (Bollegraaf) and belonging to the global top (Randstad), via strengthening home market positions (Boskalis) and being a European private-label market leader (Drie Mollen), to specialisation and integration (Numico), developing partnerships (NNZ) and strengthening chain activities (Nutreco).
3 The actual number of financial investment selection method types applied for decision-making ranges from five to ten in the sample.
4 Sensitivity and scenario analyses, which all of the sampled firms but Bollegraaf use, have little impact on the financial risk assessment.
5 Booth  shows that the applicability of the APV-method is limited in practice because of the circular reasoning involved.
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Publication information: Article title: The Financial Management of Foreign Direct Investment: A Case Study of Dutch Firms Investing in Europe. Contributors: Westerman, Wim - Author. Journal title: International Journal of Management. Volume: 23. Issue: 4 Publication date: December 2006. Page number: 851+. © International Journal of Management Dec 2008. Provided by ProQuest LLC. All Rights Reserved.
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