THE FINANCIAL MANAGEMENT OF FOREIGN DIRECT INVESTMENT: A CASE ...
THE FINANCIAL MANAGEMENT OF FOREIGN
DIRECT INVESTMENT: A CASE STUDY OF
DUTCH FIRMS INVESTING IN EUROPE
Dr. W. Westerman
Faculty of Management and Organization
University of Groningen
P.O. Box 800
9700 AV Groningen
The financial management of foreign direct investment:
A case study of Dutch firms investing in Europe
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
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.
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
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;
The author’s personal website, accessible via http://www.rug.nl/fmo, contains a list of references, which can also be supplied on request.
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. 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
. He focused on FDI decision processes, not on the final decision-making. Bower
 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 
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
for (as goals) and employed (as means) on their own (coherent) merits. Figure 1 gives the
Figure 1. Foreign direct investments in Europe: a process approach
Strategic investment Capital investment Financial risk & Organisation &
analysis selection Investment financing Behaviour
Strategic test Assessment financial Effect financial risk & Control organisation &
investment? value creation? investment financing? behaviour investment?
Internationalisation firm Financial modelling Financial risk Organisation
• nature advantages • design activities • business risk • management control
• design investment • profits, cash flows • currency risk • phasing activities
• motives investment and balance items • political risk • internal and exter-
• hurdle rates nal involvement
Strategic techniques Selection methods Investment financing Behaviour
• strategic design • accounting • capital structure • aspirations
• strategic planning • discounting • pecking order of • solving orientation
• strategic portfolio • shareholder value financing • mental mapping
• strategic value • capital sources • risk attitudes
management • settlement of • timing
obligations • use of information
• legal structures • opportunism
• fiscal techniques • reputations
Strategic Feasibility when using Feasibility after Organisational, social
Feasibility financial investment applying risk and and personal feasibility
selection criteria financing aspects
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
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
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
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).
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
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.
The actual number of financial investment selection method types applied for decision-making ranges from five to ten in the sample.
Sensitivity and scenario analyses, which all of the sampled firms but Bollegraaf use, have little impact on the financial risk assessment.
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
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
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.
Booth  shows that the applicability of the APV-method is limited in practice because of the circular reasoning involved.
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
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
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.
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
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
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
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.
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.
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