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European multinationals: A globalization scorecard

11 March 2008

As both home and host to multinational enterprises (MNEs), the European Union is unparalleled, argues Stephen Thomsen in a new briefing paper for Chatham House. A worldwide strategy for sales, production and sourcing is increasingly seen as the key to long-term competitiveness, and contrary to their lumbering, state-coddled reputation and traditional focus on regional and other key markets, European firms are now becoming genuinely diversified geographically.

It is true that much of Europe's foreign direct investment (FDI) remains within the region: on average since the early 1990s, only 32% of EU15 states' outflows have left the bloc. But even excluding FDI flows within Europe, the EU collectively is the largest foreign direct investor in the world. Its MNEs account for more than half of the world's stock of outward investment, far more than competitors in Japan, for example, or even in the USA which has a comparably sized economy.

Furthermore, EU investment is more geographically diversified than that of its rivals and dominates FDI into emerging economies in every region of the world. Historical and cultural ties explain only part of this trend: Britain's heavy investment in Latin America and Germany's in South Africa, for example, do not rely on longstanding political relations. European MNEs' strong presence in emerging markets - particularly in China, India, Russia and Brazil - will be crucial to their long-term profitability as these economies continue to grow.

Europe has in turn received more inward investment from those countries than either the United States or Japan. Overall, the prominent emerging economies with available data have invested four times as much in Europe as in the United States; only Taiwanese and Venezuelan firms have invested more in the US. Even Mexico, despite its geographic proximity, has 75% more FDI stock in Europe than in the United States.

Bilateral FDI flows between Europe and emerging economies enhance the level of integration between the regions and allow MNEs to expand their share of local markets. At a time when emerging markets are expected to represent an ever-larger proportion of global demand, such ties could well translate into improved global competitiveness for both parties, provided Europe's firms can translate their first-mover status into long-term advantage.

Read the briefing paper.

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