Netherlands' Political Stability and the Attractiveness of FDI - Case Study Example

Topic: Netherlands Political Stability and the Attractiveness of FDI Affiliation: Introduction Investment is an essential undertaking in any given economy. Countries inter-relate through investment within and without their regional settings. Foreign direct investment (FDI) is a crucial investment activity that pools together inter-country relations due to the need to exploit business aspects and opportunities that emerge in different economies around the world from time to time. Social, economic and political factors are essential determinants of the level of FDI that individuals, firms and countries at large engage in. The underlying interest in undertaking FDI operations is to invest in low risk and high return markets and economies. In this regard, political stability and the risks posed by the political system in place in a given market or economy influence FDI across countries. Netherlands is a strong and favourable FDI destination in the European economies. The U.S is a primary foreign direct investor in Netherlands among other countries. On the same note, Netherlands also invests in other countries, thereby undertaking an outward FDI. Individuals, firms, and governments engage in FDI activities around the world, with high sensitivity being accorded to political systems and governance of the specific FDI destinations. This process encompasses strategic decision making, aided by PESTLE (Political, Economic, Sociological, Technological, Legal and Environmental factors) analysis and Porters five Diamond model. These factors provide the environment of business undertakings in the FDI context, with the Diamond model evaluating the competitive advantage of a nation in a given business aspect. The attractiveness of FDI in Netherlands is not only based on the political stability of the country over time, but also on social and economic pillars that promote FDI. These pillars are used in this paper to explain the attractiveness of FDI in Netherlands, but a lot of emphasis is accorded to Netherlands’ political and governance stability. The four attributes of the Diamond model are employed to present Netherlands as a suitable FDI destination, with a significant emphasis on the Netherlands’ political environment. The political aspect of the Netherlands is therefore the central focus of this paper, with regard to FDI attractiveness. Political Environment as a Determinant of FDI FDI destinations are critically scrutinized in a bid to alleviate risk of failure. An economy that is characterized by effective governance systems attracts high levels of inward FDI and encourages its investors to engage in outward FDI in similar economies. Such a political environment is business friendly and it is often characterized by low corruption practices and fair and healthy competition in business (Holland Gateway, 2011). Unstable governments drive away inward FDI due to the prevalence of an environment that is highly characterized by investment risks. Other determining factors of FDI include: legal systems (Baltzer, 2008, p.81; Markusen, 2002, p.67), economic context (OECD, 2002a), foreign relations (Breuss, 2002, pg.245-274), infrastructure and technology (Angeloni, Flad and Mongelli, 2007, pg. 367-409) and social and cultural factors (Roland, 2005, Ch. 3; Roland, 2009; Darvas and Szapáry, 2008, pg. 44). Attractiveness of FDI in Netherlands Netherlands is an invest destination for many foreign individuals, firms and governments. The United States has for a long time been a major FDI player in Netherlands. In fact, the U.S has at one time accounted for up to 13.3% of total outbound investment in Netherlands (Encyclopedia of the Nations, 2012). This scenario has been accounted for by a fiscal climate that favours high level investments and international orientation that boosts business undertakings between Netherlands and the rest of the world. U.K and Canada joins the U.S to make the top three countries that actively engage in inward FDI in Netherlands. There are a number of factors and aspects that make Netherlands an attractive destination for FDI. Economic context, financial system and the political economy in Netherlands are the most influential factors when it comes to attracting FDI in the country (OECD, 2002b). The political aspect of the PESTLE analysis evaluates the political and governance environment of a nation, thereby determining the suitability of this environment to specific undertakings in that nation. Netherlands political aspect in regard to FDI attraction has been stable over the years. This provision allows stakeholders in the FDI sector in Netherlands to enjoy a guaranteed continuity of investments. The Netherland’s political environment is complemented by its competitive advantage, realized through the Porters five Diamond model. Among the PESTLE factors, much emphasis is accorded to political stability in the country, prior to the underlying competitive advantage. Economic context Netherlands enjoys a vibrant economy, driven by internal and external trade. Income from agro-industries, machinery equipment, chemicals and fuels drives the economy (CPB Netherlands Bureau for Economic Policy Analysis, 2011). In the contemporary times, Dutch trade has significantly increased, and so has the role played by Netherlands as a major distributing country in this trade. Employment and unemployment management in the country has been effective. Labour markets challenges are quickly addressed by the relevant authorities, making a favourable destination for FDI since investment firms prefer stable and consistent labour markets. The fiscal climate in the country is one of the most favourable in the Eurozone (Allard et al. 2008, p.223). Individuals, firms and government investments that are based in Netherlands enjoy numerous tax advantages. This country observes a tax rate that is below the average set by European Union for the corporate sector. On the same note, the country integrates creativity and innovation in investments. It therefore stimulates innovation fiscally, a scenario that lacks in many other potential FDI destinations (Heijdra, Keuschnigg and Kohler, 2004, pg. 173-200). The Dutch government advocates for a fiscal policy that promotes internal and external welfare for investors especially in FDI. This reduces economic risks associated with investment practices. Financial system This is another critical factor that primarily attracts or drives away FDI. De Nederlandsche Bank (DNB) is responsible for the regulation of Netherlands’ insurance market. Since its installation in the year 2004, more private and government investments have been directed to Netherlands compared to the period before it was set up. Insurance is an essential complement in investment activities due to the need to account for uncertainty that poses risks to investors and their portfolios (Nicoletti, 2003, p.148). The Netherlands’ financial system is fully developed compared to other economies in Europe and beyond. The country’s financial system has also successfully responded to economic hardships and recent global financial crisis (Expatax, 2008). The Dutch government also plays a significant role in influencing the financial sector, and thus creates a reliable political back up for investors in the country. During the recent global financial crisis, the Dutch government nationalized two banks and made capital injections into the financial sector (U.S. Department of State, 2012). This stabilized the banking sector and continues to maintain a well-capitalized financial sector. This process favours FDI by minimizing inconsistencies and unfavorable financial fluctuations in the Netherlands’ economy. Political environment The above two influential factors of FDI attraction are primarily based on the political context of the Netherlands. The political status of the Netherlands is crucial in influencing inward and outward FDI. A combination of the above two factor with the political environment of the Netherlands provide a low risk environment for FDI practices. This is illustrated in the figures below as provided by Roland (2009). Business transactions are highly dependent on the political environment of an economy. A stable political environment reduces risks associated with uncertainty by providing a stable and certain environment of conducting business. By so doing, the political environment enhances the installation of investment or corporate structures that are long term in nature, thereby guaranteeing continuity in business undertakings. As Netherlands achieve this, it is important to note that it is a member of the European Union (EU) and one of the original 11 countries to adopt the euro as its currency in 1999 (Angloinfo, 2012). Other EU members are yet to catch up with Netherlands in terms of social, economic and political welfare as well as inward FDI attraction. The political stability in Netherlands is determined by the country’s governance. Netherlands observes a hereditary constitutional monarchy kind of governance, and employs relevant policies and economic considerations in enhancing social, economic and political welfare. It is in this pursuit that the country attracts FDI through its political system that significantly accounts for the welfare of investors in the country. The country has policies related to international transactions that are used to monitor the effectiveness of the exchange rate regime and oversee currency management (Expatica, 2004). These policies account for the foreign currency needs of FDI stakeholders. Fiscal and monetary policies are essential in regulating currency flow and government spending respectively. Netherlands has maintained a fiscal surplus in its spending more times than many EU members. This and stability in currency flow and currency value has persistently made Netherlands an FDI target. The business environment is further made favourable by laws and business regulations that account for investor welfare (OECD, 2002c; IMF, 2004b). As a result, the labour markets are flexible, with matching demands and supply of labour. Readily available labour which is also cost effective makes the country a major FDI target by other countries around the world, where labour is expensive and investment costs are high. The legal system in the country strictly monitors transparency and corruption issues, a situation that has resulted in social and regional stability (World Bank, 2011). Political rights are therefore strictly observed, thereby enhancing human development in all aspects of life. The overall achievement of these actions is the installation of a very stable government over the years. The fact that there has been political turmoil in Netherlands cannot be overlooked. However, the actions that the political system in place has taken to resolve emerging disputes serves as an example to many other countries in the EU and beyond. This has marketed the Netherlands as a suitable FDI target globally. Critical Reflection FDI has for a long time now been a fundamental aspect to account for in any given economy. Basically, there are numerous factors that influence inward and outward FDI across countries. With this in mind, it was necessary to concentrate on one of the major influencing factors, in this case, the prevailing political environment in Netherlands. After a critical review of relevant political literature that relate to Netherlands, I found that the country has successfully maintained a stable political environment over the years. This means that the country’s attractiveness of FDI is highly linked to political stability in the country. However, this is not a reflection of all countries in Europe. Netherlands runs a constitutional monarchy form of governance. Many research works and economic studies have negated FDI attractiveness in such a political environment. However, the successful phenomena in Netherlands make it necessary to re-assess such claims or hold such claims as backdated. Numerous researches and sources argue for and against the favourability of Netherlands’ political environment in terms of investment. The actual scenario however is proving that only extensive evaluations and assessments of this environment are likely to refute Netherlands’ political stability and her vibrant FDI sector, if not to uphold the current status. References Allard, C. et al. (2008), Macroeconomic effects of EU transfers in new Member States, IMF Working Paper, No. 08/223. Angeloni, I., M, Flad and F,P, Mongelli, (2007), Monetary integration of the new EU Member States: What sets the pace of euro adoption?, Journal of Common Market Studies, Vol. 45, No. 2, pp. 367-409. Angloinfo, (2012), Guide to Building & Planning Permits in the Netherlands. [ONLINE] Available at: http://southholland.angloinfo.com/countries/holland/build.asp. Baltzer, M. et al. (2008), Measuring financial integration in new EU member states, ECB Occasional Paper, No. 81. Breuss, F, (2002), Benefits and Dangers of EU Enlargement, Empirica, Vol. 29, No. 3, pp. 245-274. 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