THE FINANCIAL MANAGEMENT OF FOREIGN

DIRECT INVESTMENT: A CASE STUDY OF

DUTCH FIRMS INVESTING IN EUROPE

Wim Westerman

July 2005

**********************************************

Dr. W. Westerman

Faculty of Management and Organization

University of Groningen

P.O. Box 800

9700 AV Groningen

The Netherlands

Telephone: +31-50-3637088

Fax: +31-50-3637356

Internet: w.westerman@bdk.rug.nl

The financial management of foreign direct investment:

A case study of Dutch firms investing in Europe

Summary

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.

1. Introduction

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.

1

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 investors1. 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

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

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

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

[1966]. He focused on FDI decision processes, not on the final decision-making. Bower

[1970] 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 [1985]

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

4

for (as goals) and employed (as means) on their own (coherent) merits. Figure 1 gives the

resulting model.

Figure 1. Foreign direct investments in Europe: a process approach

Strategic investment

analysis

Capital investment

selection

Financial risk &

Investment financing

Organisation &

Behaviour

Strategic test

investment?

Assessment financial

value creation?

Effect financial risk &

investment financing?

Control organisation &

behaviour investment?

Internationalisation firm

nature advantages

design investment

motives investment

Financial modelling

design activities

profits, cash flows

and balance items

hurdle rates

Financial risk

business risk

currency risk

political risk

Organisation

management control

phasing activities

internal and exter-

nal involvement

responsibilities

Strategic techniques

strategic design

strategic planning

strategic portfolio

strategic value

management

Selection methods

accounting

discounting

shareholder value

Investment financing

capital structure

pecking order of

financing

capital sources

settlement of

obligations

legal structures

fiscal techniques

Behaviour

aspirations

solving orientation

mental mapping

risk attitudes

timing

use of information

opportunism

reputations

Strategic

Feasibility

Feasibility when using

financial investment

selection criteria

Feasibility after

applying risk and

financing aspects

Organisational, social

and personal feasibility

5

Feasibility investment

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, 1990]. 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.

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).

6

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 methods3: the net present value

method, the internal rate of return method and the flow-to-equity method. Shareholder value

methods, favoured by the Anglo-Saxon oriented firms, extend these discounting methods

with a strategic component [Rappaport, 1986] or a reporting view [Stewart, 1991]. Only

acquirers explicitly distinguish between stand-alone 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 reduce financial 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

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.

7

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 long-term 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

5 Booth [2002] shows that the applicability of the APV-method is limited in practice because of the circular reasoning involved.

8

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].

5. Conclusions

A closing balance of our study on financial management of European investments by Dutch

firms can be made up now. 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.

9

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 commonly marked 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 anyway, 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

10

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.

6. Recommendations

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.

11

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.

References

Aharoni, Y., The Foreign Investment Decision Process, Harvard Business School,

Boston, 1966.

Anthony, R.N.; V. Govindarajan, Management Control Systems, Irwin, Homewood Il, 11th

edition 2004.

Arzac, E.R., Valuation for mergers, buyouts, and restructuring, John Wiley, Hoboken, 2005.

Booth, L., Finding Value Where None Exists: Pitfalls in Using Adjusted Present Value, Journal

of Applied Corporate Finance, Volume 15 Number 1, Spring 2002, pp. 95-104.

Bower, J.L., Managing the Resource Allocation Process: A Study of Corporate

Investment, Harvard Business School Press, Boston Mass, 1970 (reprint 1986).

12

Bouma, J.L., Leerboek der Bedrijfseconomie, deel 1; Inleiding, Delwel, Wassenaar, 1982.

Buckley, A., Multinational Capital Budgeting, Prentice-Hall, London, 1996.

Cyert, R.M.; J.G. March, A Behavioral Theory of The Firm, Prentice-Hall, Englewood Cliffs

N.J., 1963 (second edition 1992).

De Bondt, W. de; R.H. Thaler, Financial Decision-Making in Markets and Firms: a Behavioral

Perspective, Finance, Series of Handbooks in Operations Research and Management Science,

Elsevier North-Holland, 1994.

De Nederlandsche Bank (DNB), http://www.dnb.nl, 2002.

European Union, http://europa.eu.int, 2002.

Grotenhuis, F.D.J., Patterns of Acculturation (Ph. D. dissertation), University of Groningen,

2001.

Jensen, M.C.; W.H. Meckling, The Theory of the Firm: Managerial Behavior, Agency Costs

and Ownership Structure, Journal of Financial Economics, Vol. 3 October 1976, pp. 305-360.

Mintzberg, H.; J. Lampel, Reflecting on the Strategy Process, Sloan Management Review,

Spring 1999, pp. 21-30.

Myiake, M.; M. Sass, Recent Trends in Foreign Direct Investment, Financial Markets and

Trends, No. 76, June 2000, pp. 23-41.

Pike, R; B. Neale, Corporate Finance and Investment: Decisions and Strategies, Prentice-Hall,

London, 1993.

Porter, M.E., Competitive Advantage of Nations, The Free Press, New York, 1990.

Rappaport, A.L., Creating Shareholder Value: The New Standard for Business Performance,

The Free Press, New York, 1986.

Rugman, A.M., Regional strategy and the demise of globalization, Journal of International

Management, Volume 9, 2003, pp. 409-417.

Shapiro, A.C., International Capital Budgeting, in: Joel M. Stern en Donald H. Chew Jr. (red.),

New Developments in International Finance, Basil Blackwell, Oxford, 1988, pp. 165-179.

Simon, H.A., Administrative Behavior: A Study of Decision Making Processes in Administra-

tive Organization, Macmillan, New York, 3rd edition 1976.

Stewart, G.B., The Quest for Value: The EVA Management Guide, HarperBusiness, New York,

1991.

Tempelaar, F.M., Het gezicht van de theorie van de ondernemingsfinanciering (“the face of

13

corporate finance”), Maandblad voor Bedrijfsadministratie en –Organisatie, 90e jaargang,

februari 1986, pp. 30-32.

Tomkins, C., Corporate Resource Allocation: Financial, Strategic and Organizational

Perspectives, Basil Blackwell, Oxford, 1991.

Walsh, C., Key management ratios: how to analyze, compare and control the figures that drive

company value, Financial Times/Prentice Hall, London, 1996.

Wissema, J.G., An Introduction to Capital Investment Selection, Frances Pinter, London,

1985.

Yin, R.K., Case Study Research: Design and Methods, Sage Publications, London, 2nd edition

1994.

14