The State of Foreign Companies in Denmark Consolidated Survey Results the voice of foreign companies October 23, 2008 1
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Executive Summary This document contains the key findings from two independent surveys conducted by IBM Global Business Services and Slotsholm on behalf of AmCham Denmark. It highlights the barriers to economic and job growth faced by foreign companies in Denmark and identifies the risks that may lead to missed opportunities for their future investments. IBM s Investment Trend Report showed Denmark doing well on attracting investments and jobs in the life science and ICT clusters. This is encouraging as both sectors are experiencing growth worldwide. However, two underlying issues threaten the gains made in 2007. First, the continued shortage of highly qualified labor will restrict growth if bold action is not taken. Second, almost half of the jobs created in the life science sector were attributed to a single company, Biogen Idec, which artificaiilæy makes 2007 numbers look overly optimistic. Renewable energy investments are growing rapidly throughout the world. It is surprising therefore, that Denmark is lagging far behind despite being the darling of clean energy usage and possessing competence in renewable energy related technologies (wind and biofuels). In fact, Denmark is only on par with Romania and Peru when compared on jobs created in renewables per 100.000 inhabitants. Furthermore, in spite of various top rankings in the international media (Economist, Forbes, World Economic Forum) regarding Denmark s business environment and competitiveness, actual performance in terms of job creation from investments when looking at population size, is not top. In fact, Denmark is in 18th place, trailing its Nordic neighbors and other peer European countries. A look at what the people running foreign companies in Denmark sheds light on this position. The Slotsholm 2008 Foreign Company Survey identified the biggest barriers to foreign investment growth - the high rate of taxation and the continued shortage of highly skilled labor. The companies surveyed stress that these two factors are highly correlated and are adversely affecting their ability to grow. One disturbing finding is the lack of confidense that is building in foreign companies. The majority find the government to be unresponsive and that the few political initatives that have been set forth in 2008 offer little to no relief. Foreign companies have a strong interest in succeeding in Denmark. What s needed is the business and social conditions to make it happen. The results of these two surveys provide a clear picture of where action must be taken and points to the potential consequences if they are not. 3
2008 Investment Trend Report - Denmark IBM Global Business Services Denmark lacks the skilled labor to drive knowledge driven sectors National economies are tied together globally and have become increasingly far-reaching. As competition forces companies to explore new locations in their search for markets, talent, and greater efficiency, the prospect of growth and prosperity is extended to more people than ever before. Hence, notwithstanding a cyclical decline in overall global investment activity, the geographic expansion of investment continues as companies persist in their efforts to identify new opportunities, resulting in a constantly changing international economic landscape. In this context, Denmark had a good year for foreign investment in 2007, with the country experiencing 10% growth in jobs created from inward investment compared to 2006. What is particularly encouraging was the substantial increase and improved international position in life sciences, a key target sector for the Danish economy. Taking a longer term perspective, it is clear that ICT is also a dominant sector for inward investment to Denmark, suggesting that the country has particular strengths in this area. These findings in the 2008 Investment Trend Report Denmark (see page 8 for details) conducted by IBM Global Business Services indicate a positive development for Denmark towards the desired path of growth through a focus on knowledge driven sectors. However, while the renewables sector represents one of the fastest growing sectors for foreign investment globally, Denmark is not benefiting from this increased investment. Accordingly, it does not yet appear as if the country has managed to position itself as a key location for renewables, with the possible exception of wind energy. More worryingly, the country is currently experiencing a considerable tightening of the labor market, with companies struggling to hire and retain the required skilled labor. This represents a major threat to future investment and success in sectors such as ICT and life sciences, which are very much skills driven. Consequently, if Denmark is to maintain and improve its success in its key sectors, the skills issue needs to be urgently addressed. Companies continue to reassess and modify their global footprint, and more locations are emerging as potential candidates for different types of investment. Therefore, Denmark must constantly improve its business environment if it is to maintain or improve its position in the increasingly competitive economic landscape. 4
European competition increases for service investments In Europe, the widening of the global economy manifested itself in increasing investment activity outside the European Union, with countries in South-East Europe emerging as locations for investment. For a growing number of companies, their investment activity is widening beyond South-East Europe to the Middle East and North Africa as locations to serve European markets. This is largely explained by the rapid tightening of labor markets and rising cost levels in new EU member states, resulting in companies looking for opportunities elsewhere. As cost levels rise and the hiring and retaining of staff becomes more difficult, companies are increasingly willing to look at locations that were before perceived as too risky. When taking population size into account, the dominance of Eastern Europe is still evident, with the six top European locations being Eastern European countries. Ireland and the UK, followed by Belgium and Finland, are the top locations in Western Europe by this measure. Denmark is ranked 18th in Europe on this indicator (see figure 1), below the majority of EU countries, including Sweden. Furthermore, far from being merely the manufacturing hub of Europe, some locations in Eastern Europe are emerging as serious competitors for services investment. For example, a significant proportion of Romania s and Hungary s inward investment is now in service activities. Indeed, a large part of the growth in investment for these two countries has been in services rather than production. This suggests that the widening scope and competition for investment is extending into services functions that were previously focused on Western European locations. In the case of Denmark, where over 40% of investments were service related in 2007, action must be taken to ensure that competitive advantage is maintained relative to Eastern European countries. This means maintaining a supply of high quality labor at a reasonable cost. Figure 1: Top ranking destination countries in Europe by estimated jobs, per 100,000 inhabitants 2007 Hungary Bulgaria Czech Republic Slovakia Serbia Romania Ireland United Kingdom Poland Macedonia Belgium Finland Latvia Bosnia and Herzegovina Sweden Moldova France Denmark Spain Netherlands 0 50 100 150 200 250 300 350 400 Source: Investment Trend Report Denmark, IBM Global Business Services, October 2008, p. 10 5
Global renewable energy investments boom, but not in Denmark Worldwide, more than 32,000 jobs were created from 202 foreign investment projects in the renewables sector in 2007, highlighting that the sector is becoming a significant source of foreign investment, notably in the two sub-sectors solar and biofuels. Brazil and Malaysia were the top two recipients, with each country receiving a little over 3,500 jobs. Denmark received approximately 100 jobs during 2007. When taking population size into account, Singapore is the world s top destination in 2007. Denmark is ranked 18th, having created less than 2 jobs per 100,000 persons. Over the entire period, from 2003-2007, Denmark received 7 projects creating 629 jobs in the renewables sector. The majority of these jobs were production related with less than 5% of the jobs created in higher value R&D functions (see figure 2). Hence, while renewables is a growing sector globally, there is only limited investment going to Denmark. The renewables investment into Denmark is predominantly in wind energy (see figure 3), which is largely explained by the considerable domestic sector and market for wind energy in Denmark, with investments in production facilities in this sector being largely market driven. However, Denmark is receiving no investment in solar energy projects, which is the main sub-sector of renewables investment globally. Similarly, Denmark s share of the considerable market for investment in biofuels is negligible. This suggests that Denmark may have niche strengths in wind energy projects, but that there is no broader strength in environmental technologies as such. % Figure 2: Investment by business function in renewables, 2003-07 % Figure 3: Investments by sub-sector in renewables, 2003-07 100 100 95 % 90 80 90 80 84 % 70 70 60 60 50 50 40 40 30 30 20 20 16 % 10 10 4 % 0 1 % 0 Production R&D Services Wind Sources: Investment Trend Report Denmark, IBM Global Business Services, October 2008, p. 22 Biofuel 6
2008 Foreign Company Survey Slotsholm Foreign companies need highly skilled labor Denmark is a country that is worth investing in. This is not only evident in Denmark s increased investments in 2007, but also the professional opinion of nearly 95% of CEOs running foreign companies in Denmark surveyed by Slotsholm (see page 8 for details). The attractiveness of a country to foreign investment is attributed to two factors social conditions that are competitive and deliver high quality; and a fit between a company s products/ services and the local market. Denmark offers both to varying degrees. On the market side, Denmark provides strong local access for products and services, as well as close proximity to existing business partners. Of the social conditions important to foreign companies, the majority indicate that the education level and flexibility of the labor force is highly attractive in Denmark. However, when CEOs point to the biggest barriers to foreign investment, they point to high taxation rates and the continued shortage of labor. These two social conditions led to the majority of foreign companies seeing little or no change in Denmark s global competitiveness in the first 10 months of 2008. Foreign companies see the high marginal tax on wages as the biggest barrier to attracting highly qualified labor. It is not surprising that more than 90% indicated that if marginal tax rates were lower, it would be easier to hire the highly qualified labor in short supply. Also, if given the choice between lower corporate taxation or lower marginal tax rates, more than 50% would choose lower marginal tax rates, highlighting the positive effect it would have on foreign investment. Almost 90% of foreign companies surveyed asserted that, to some degree, they will be negatively affected by the shortage of highly qualified labor. When asked if government actions taken in the last year have helped relieve the shortage, nearly half of the surveyed CEOs replied that there has been little or no effect from government action. It is also worth noting that the Slotsholm survey was conducted from September 24, 2008 to October 6, 2008 while the Dow Jones Industrial average fell 11% and the OMX C20 fell 19%. Also, during the surveying period, the U.S. House of Representatives rejected the $700 billion bailout package. And yet, in the height of the international finance crisis, the majority of foreign companies still do not plan on decreasing their investments. The responses show that they are more concerned about the lack of necessary skills to drive their organizations. 7
The high marginal tax rate is impacting growth One third of foreign companies in Denmark stress that high taxation is the biggest barrier to foreign investment (see figure 4). Nearly 30% stated that the high marginal tax rate on wages is the most pressing problem, 6% point to corporate tax rates and 4% claim the taxation of foreign experts under the expat taxation plan. The short supply of highly qualified labor, which according to the survey is directly related to the high marginal tax rate, is the second biggest barrier to growth. Nearly 37% warn that the continued shortage will result in a decrease in investment. Over half caution that there will be zero growth if the shortage persists. In comparison to the 2007 Foreign Investors Survey conducted by Gallup, these results indicate a shift in the barriers to growth. In 2007, the majority of foreign companies emphasized market conditions as the biggest barrier to growth - specifically market access and market size. It is noteworthy that in this year s survey, high taxation and the shortage of qualified labor now dominate the threats to the future growth of foreign companies operating in Denmark. 50 % Figure 4: The biggest barriers to growth 40 30 20 10 0 High taxation Shortage of qualified labor Immigration laws & inadequate integration Other Do not know Source: 2008 Foreign Company Survey, Slotsholm, p. 5. (October 7, 2008) 8
Foreign companies are adversely affected by the labor shortage Most foreign companies in Denmark are finding it challenging to attract, hire and retain highly qualified labor in their organizations. Almost 90% state that the labor shortage is having a negative impact on their organization (see figure 5). Foreign companies believe that some political steps have been taken to help relieve the shortage of highly qualified labor. But more than 50% indicate that the initiatives thus far have not been responsive enough to ensure the adequate supply of this much needed labor. In fact, the 2008 Job Plan is seen by half of surveyed CEOs as having little or no effect on easing the shortage. One of the Job Plan s key initiatives was to expand the expatriate taxation plan to offer both a three year and five year program at varying rates of taxation. The aim was to provide companies with a better tool to recruit foreign experts. However, less than 10% see the expanded plan as being highly effective to attract foreign experts. Only 30% see the new plan as being somewhat effective. Most worrying, however, is the 45% that see the new plan as having little to no effect at all to attract the foreign experts that are needed in their organizations. % 50 Figure 5: Adverse impact of labor shortage on foreign companies 40 30 20 10 0 High degree Some degree Low degree No impact Source: 2008 Foreign Company Survey, Slotsholm, p. 5. (October 7, 2008) 9
About The Surveys 2008 Investment Trend Report - Denmark The Plant Location International Survey by IBM Global Business Services provides an outline of key investment trends globally and in Europe for 2007. In addition, the report contains more detailed analysis of investment trends in Denmark for the period 2003-2007, with a particular focus on three sectors: life sciences, ICT and renewables. The analysis is based on analysis of data from IBM s proprietary Global Investment Locations Database (GILD). GILD records investment project announcements around the world on an ongoing basis. The GILD database is maintained by IBM-Plant Location International (IBM-PLI), a specialized service within IBM Global Business Services, Strategy & Change consulting. Moreover, IBM- PLI draws on extensive expertise and knowledge of what shapes corporate investment decisions. IBM-PLI works with economic development organizations and investment promotion agencies in their efforts to improve and market their locations as attractive business environments for present and new investors. 2008 Foreign Company Survey The 2008 Foreign Company Survey consisted of 19 questions with the aim of gathering the perceptions from foreign company CEOs on the state of Denmark as a foreign company investment location. The survey was conducted by Slotsholm on behalf of the American Chamber of Commerce in Denmark. The surveying period was from September 24, 2008 to October 6, 2008. The survey was sent to the CEOs of 275 foreign companies operating in Denmark. Out of the 275 companies, 112 responded, giving a response rate of 41%. The survey was made up of multiple choice questions with some questions also offering the opportunity to provide supplementary or additional explanations. To download the complete 2008 Foreign Company Survey Report, go to fis08.amcham.dk. To download the complete 2008 Investment Trend Report Denmark, go to fis08.amcham.dk. The American Chamber of Commerce in Denmark (AmCham Denmark) is a non-profit, non-governmental, business association representing more than 290 companies actively investing in Denmark. AmCham Denmark is committed to building a competitive, sustainable foreign investment environment in Denmark, and to doing its part to minimize barriers to trans-atlantic trade. 10 Christians Brygge 26 DK - 1559 Copenhagen V Tel (+45) 33 932 932 Fax (+45) 33 932 938 mail@amcham.dk www.amcham.dk