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By Carmen Raluca Stoian | February 22, 2019
Ever since the EU referendum of 2016, well-known companies have announced decisions to relocate outside of the UK. Electronic giant Panasonic has gone to Amsterdam, where Sony will soon follow. Ferry company P&O will shift registration of its vessels to Cyprus, while the engineering firm Dyson is moving its corporate headquarters to Singapore.
There is nothing new about big businesses relocating their corporate headquarters. Back in 2003 the United Nations Conference on Trade and Development was hailing the arrival of a world market for such possibilities. And even iconic American companies have decided to move, including Burger King (to Canada), Budweiser (to Belgium), and Lucky Strike (to the UK). So why do they do it? And what are the benefits of moving?
One of the most obvious and compelling reasons to move is the desire to increase profits. There can be huge tax breaks associated with being a legal entity registered in a tax haven. Ireland, Switzerland and Panama have all attracted this kind of investment.
But a move like this comes with potential costs however. Companies risk damage to their reputation – including accusations of tax avoidance and unethical behaviour, while the countries they move to face increased scrutiny.
Another reason to relocate is to base the business in a major financial centre such as London, New York, Frankfurt or Hong Kong. Firms that do this may be motivated by better opportunities to raise capital and have access to highly specialised talent. This kind of move is particularly popular with businesses from emerging economies as it shows a commitment to robust legal standards and business practices. This can enhance their reputation (and subsequently, performance).
Finally, businesses sometimes relocate as a result of an acquisition. When a company is bought up by another company, its corporate location may switch to that of the buyer – this is what happened when Budweiser moved to Belgium, after it was bought by InBev.
Yet despite all these motives to relocate, for many multinationals there is no place like home. This could be because it is where the founder is from, and where they managed to provide a solution to a business problem which existed in that country – where an entire ecosystem crucial for setting up the business exists, and where the main stakeholders are.
So when a relocation of a corporate headquarters happens, as in the case of Dyson and P&O, push factors may be at play too. Some corporations decide to relocate when the home country ecosystem that has made them competitive in the first place is damaged, and the perceived advantages of a new home market are higher than the perceived advantages of their country of origin.
This is where Brexit clearly matters for many businesses that have their corporate headquarters in the UK. When uncertainty strikes, when there are worries about attracting talent, when the legislative regime is unclear and the quality of the services available is under threat, the issue of where the headquarters should be located becomes salient.
Why worry?
The economic impact of relocation varies. Some corporate headquarters have very limited functions and only a limited number of staff, while others are larger employers, so the job losses differ from case to case. Nevertheless, the jobs that are relocated are usually highly skilled, specialised jobs that are very well paid and often highly taxed. Corporate tax revenue losses may also be significant.
Also, the economic impact goes far beyond the company itself. A relocation can lessen demand for highly specialised services such as legal advice, banking, and logistics – all of which have a negative effect on the economic ecosystem of the home country and its ability to attract future investors.
Last but not least, relocation is highly symbolic. While some businesses choose to relocate to show a commitment to a new region (where arguably their most important customers and competitors are) this move surely sends to opposite message to their former home country – a country that no longer fully meets the needs of an investor with global ambitions.
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Investor confidence is crucial to make or break an investment destination, and investors often follow the decisions of others. With the continuing uncertainty of Brexit, it is likely that more companies will decide to relocate. Those who set up their regional headquarters in the UK as a stepping stone for further expansion in the EU will be no doubt be thinking of a change, while many EU governments are doing their best to lure them away.
Amsterdam has already snapped up Sony and Panasonic through its location, competitiveness and excellent quality of life. Dublin is hoping to appeal to US investors through the shared language, historical links between the two countries, a welcoming investment climate and tax breaks. Berlin, the new start-up capital of Europe, is trying to attract UK entrepreneurs with its low set-up costs, good higher education institutes and infrastructure, as well as a young and diverse talent pool. Paris is aiming to lure international banks away from the City of London by easing regulation.
Soon after the EU referendum, a KPMG survey showed that 76% of the 1,300 CEOs surveyed around the world were looking to relocate the headquarters of their firms. Although some of the CEOs’ opinions may have changed since then, there has certainly been a recent trend in moving headquarters away from the UK. If too many companies decide to join them, there will be worrying times for those left behind.
Carmen Raluca Stoian, Lecturer in International Business, University of Kent
This article is republished from The Conversation under a Creative Commons license. Read the original article.