Analysis Of Belgium As A Region With Investment Opportunity

This paper observes the most notable characteristics of Belgium and assesses the effect that current events will have upon the country. This information is then utilized to analyze its implications for foreign investors who may be considering the region as an investment opportunity.

Background Information

Geographic Location and Population Demographics

Belgium is located in central Europe, adjacent to the United Kingdom, Germany, and France, all of which are among Europe’s largest economic players. The region that lies between Liverpool (UK) and the Genoa region (Italy) alone provides 60% of Europe’s purchasing power and 30% of the total customer base, with Belgium strategically located at its center.

Belgium is a fairly small country that is less than half the size of South Korea with only 30,528 square kilometers of land area. However, Belgium currently has a population of approximately 11.6 million, giving it a high population density of 352 people per square kilometer. This high population count, in addition to Belgium’s unique history of being frequently ruled by other countries, has created a diverse conglomerate of multiple languages and cultures – Belgium roughly divides into the Dutch-speaking Flemish of the North and the French-speaking Waffelers of the South, along with a sizable portion of Jews, Poles, and Italians spread throughout. A small portion of Eastern Belgium utilizes German as their standard vernacular. Belgium, therefore, has three official languages: Dutch, French, and German. While the existence of so many cultures and languages may serve as a barrier when determining marketing strategies, it also makes it an ideal experimental site or multinational companies. As such, numerous multinational enterprises, including Coca-Cola, Caterpillar, UPS, and Toyota, have established their European headquarters in Belgium.

Social Stratification

Belgium has a unique social stratification structure that holds many implications for the cultural values that its people prioritize. The vast majority of the population is middle class, with only 5 to 6% bordering poverty and an even smaller percentage being affluent. The abundance of people who are able to lead an economically comfortable lifestyle induces a society where most have equal opportunities for higher education and professional life.

The country’s economic prosperity also makes it possible for the government to provide strong social security and healthcare for the socially disadvantaged groups. All of these factors lead to a society with high standards for living, education, and healthcare, which is reflected in Belgium’s categorization of being “very high” on the Human Development Index. The country’s abundance of individuals with higher education and professional work experience leads to an environment where most workers can generate a high level of productivity. As such, Belgium has high labor productivity per hour worked and an abundance of productive high-level staff with comparatively lower salary cost, both of which are displayed in the graphs below: This implies that foreign investors will be able to find skilled workers willing to work for an affordable salary in Belgium.

Political Structure

Belgium is a federal parliamentary democracy under a constitutional, popular monarchy. The power of the monarchy is restricted by the bicameral federal parliament, which is composed of a Senate and a Chamber of Representatives. This democratic governmental structure allows Belgium to be a highly developed, capitalist country despite its existence of a hereditary monarchy.

Culture

Religion

The Belgian Constitution guarantees freedom of belief. National laws recognize six religions: Catholicism, Islam, Protestantism, Judaism, Orthodox, and British Catholic Churches. A majority of the Belgian population is Christian, with 52.9% being Catholic, 2.1% being Protestant, 1.6% being Orthodox, and 4.1% being other Christians as of 2015. This amounts to a total of 60.7% being Christian. This number was much higher in the 1900s, which may explain the active development of modern capitalism in Belgium. This statistic also coincides with the fact that Belgians generally value hard work and recognize the significance of investing more in capitalistic enterprises (long-term wealth generators) and less on worldly pleasures (short-term satisfaction). These tendencies serve as an additional basis for Belgium’s open mind towards foreign investors and potential activities for capitalistic growth.

Social and Business Culture

Belgians place a strong priority on providing for their family and thus are much more oriented to serve their individualistic needs rather than the needs of the country or government as a whole. The amount of value and respect that Belgians, therefore, place on individuals creates a society where egalitarianism is highly valued. This tendency is directly reflected in how women are not required to change their surnames after marriage.

Another key characteristic is that Belgians place great importance on appearing presentable to others. This includes not only personal appearance (such as dressing well, being well-mannered, etc.), but also factors such as having a clean driveway and a house with a tidy outer appearance.

Belgians believe that the obligation to the family is usually the primary task of a person. For example, in Belgium, egalitarianism is highly valued and they do not require women to change their names after marriage. Also, the appearance of others is considered important. For example, cleaning the sidewalks and sweeping the streets are common. The Belgian people put a lot of importance in cleanliness, dressing well, and making good impressions to others.

These characteristics are directly linked to Belgium’s business culture, where professional business attire and a formal procedure for all forms of decision making are highly valued. The thoroughness that many Belgians adopt with their housekeeping is also reflected in their tendency to be prudent and careful when making decisions in the business realm. Ideally, every decision is formal, contractual, and final. In turn, it generally takes much longer to reach decisions, and it is common for business conferences to be drawn out over an extended period of time.

Foreigners conducting business in Belgium must also take note of the fact that timeliness is a very important value and often seen as an essential method of creating a positive first impression. All business-related tasks should be conducted in an extremely formal and professional manner.

Hofstede’s Cultural Dimensions

In order to gain a more quantifiable, standardized approach to culture, an arguably subjective concept, we examined Belgium’s rating for each of Hofstede’s six cultural dimensions released by Hofstede Insights:

Our deductions for the implications of each numerical rating are listed below.

1. Power Distance: 65. This reasonably high score implies that Belgium has a society where hierarchy and inequality between members in a business organization are accepted to a certain extent. This is reflected in the fact that information flow in most firms operating in Belgium follows the company’s hierarchical structure.
2. Individualism: 75. The high ranking indicates that Belgium has a very individualistic society. This directly correlates with our aforementioned research, which states that Belgians tend to prioritize their family and individual needs over the needs of an entire government or society.
3. Masculinity: 54. Belgium is neither masculine nor feminine, but rather somewhere in the middle. Thus, the confrontational negotiating method typically adopted in the United States is less effective and compromise is preferred over having a winning and losing side to an argument.
4. Uncertainty Avoidance: 94. Belgians tend to want certainty in all realms. This is reflected in their preference for thorough, pragmatic decision-making processes backed by extensive context and reasoning, despite the fact that these types of decisions take much longer to reach.
5. Long Term Orientation: 82. Belgians are generally open to adapting their traditional values to the constantly evolving environment. It can, therefore, be assumed that they value investment in modern education and research, as it allows them to embrace and adjust to changing conditions.
6. Indulgence: 57. Belgium is moderately indulgent. While it generally does place a certain amount of importance in satisfying personal wants and enjoying life, it also has an ability to save and invest in the future.

Foreign Policy

Tax Regulations

The corporate tax rate was recently reduced from 33% to 29% for large-scale companies in 2018. It is expected to drop further to 25% in 2020. However, the question as to how actively this change will be implemented remains unanswered. Belgium has other attractive tax laws, such as its provision of tax breaks for R&D and capital goods investment.

Attitude Towards Foreign Firms

Belgium has always been open to foreign investment and has adopted a policy of welcoming foreign investment. Investment incentives are based on non-discriminatory principles. The incentive system for investing in foreign companies consists of several different methods: direct assistance in the form of subsidies linked to investment, favorable financial measures, employment and training measures, and foreign trade opportunities. The incentives given to SMEs are different from those given to large enterprises and are relatively flexible.

Belgium's Economy

Belgium’s nominal GDP in 2018 was 533.15 billion USD and ranked 23rd among other nations. Belgium’s GDP is highly concentrated on the service sector. The service sector is contributing 77% of its nation’s GDP; meanwhile, the industry sector is contributing 22% and the agriculture sector is contributing less than 1%. Belgium’s GDP per capita was 50,851 USD and ranked 17th in the world. However, their PPP has been ranked 37th. GDP per capita is comparatively high among other nations. Their annual growth rate of GDP was 1.2% in 2018, and the unemployment rate was 5.7%

The annual GDP growth rate is slowly decreasing. On the other hand, their unemployment rate has been consistently decreasing since 2016, and their public expenditure and private consumption rates are increasing. In June 2018, the National Bank of Belgium announced that Belgium’s expected annual GDP growth rate will be 1.5%, which would be a turnaround in its consistent drop in GDP growth rate.

Belgium’s International Trade

Belgium has been part of many international organizations that facilitate trade for a long time. They have been part of the GATT/WTO since January 1, 1948 (WTO, 2019), the World Bank since December 27, 1947 and the World Customs Organization (WCO) since December 11, 1952. Also, the WCO headquarters is located in Brussel, the capital of Belgium. Additionally, the North Atlantic Treaty Organization (NATO) has its headquarters in the same city. This emphasizes that Belgium is an important country for the international community.

For a long time, Belgium has been involved in international trade. In 2015, they were ranked as the 12th largest exporter in the world and the 14th largest importer. This also positioned them as the 6th largest importer and exporter within the 28 EU countries (BFTA, 2016). As of 2018 more than 70% of all Belgian trade was within the confinements of the European continent. Chemical products, transport equipment, and machinery equipment stood for more than 45% of their total exports and their biggest trading partners were Germany, France and the Netherlands, all within Europe.

A measurement which is often used to assess the relative importance of trade in an economy is the trade percentage of GDP. It is also an indicator of how reliant an economy is on its international trade. The measure is simply import and exports over GDP. If one compares graphs 1 and 2, one can clearly observe that this measure is considerably higher for Belgium than the world average. Both graphs have year on the x-axis and trade percentage of GDP on the y-axis. If one compares with Korea, they had a trade percentage of GDP in 77,68% in 2016, while Belgium had more than double that at 164%. Using this measure, Belgium is one of the countries in the world which relies most heavily on international trade for economic development.

Belgium has, for a long time, attracted a large amount of Foreign Direct Investments (FDI). The last few years, this trend has shifted. FDI inflows dropped significantly from 2016 to 2017. Many factors can explain this occurrence: High electricity prices, the Belgian corporate tax regime, FDI has been falling in several developed countries in the last few years, etc. Also, FDI is heavily dependent on European countries, which could be expected because of the geographical proximity. This makes the country even more dependent on the region and could enhance the effects of Brexit. It is still uncertain how these effects will affect Belgium. It could divert investments from the British area to Belgium, or it could make investors leave the European market because of higher risk. The country should focus on developing ties with nations outside of Europe to diversify both FDI inflows and its international trade, thereby making them less vulnerable to regional difficulties.

European Union

What is the EU

To obtain a better understanding of Belgium, one must know more about the EU. EU stands for European Union and it is the biggest form of regional economic integration and currently, there are 28 member nations. Also, the EU is now planning to move on to political union as well. Member countries have no customs duties to be paid, which helps international trade between member nations to make more profits and to cut down the transaction costs. Also, through their unity, member nations get stronger voices in the global market. Summation of the member nations’ GDP is about 16.8 trillion dollars and this value is close to that of the US. Moreover, from 2004 to 2014, EU’s GDP was even bigger than the US economy, so the EU's impact on the world economy is relatively huge.

Furthermore, the EU has set an area called Schengen since 1985, and it worked as a tool for lowering the barriers among European nations either economically or politically. In the Schengen area, not only EU citizens but also non-EU citizens are free to travel across the borders. This area contributes to eliminating the internal borders between member nations of the EU, which helps tourism and businesses in Europe. Major countries contributing to the EU's budget such as Germany and France are included, and Belgium has been a member of this area since 1995 as well.

Trade between any two nations in the Schengen area has, on average, increased in total by 0.1% per year approximately. Also, removing a border between the countries has the same effect of removing a 0.7% tariff. This is not just an advantage for the nations in the EU, but also countries outside of the Schengen area. Since 1985, the Schengen has steadily expanded to a larger range, and today almost every EU nation is involved. Furthermore, few associated non-EU countries are involved as well.

Belgium in EU

Currently, the Headquarter of the EU is located in Brussel, Belgium. This contributes to the fact that Belgium’s GDP is highly concentrated on the service sector. Among the 28 member nations of the EU, Belgium has ranked 7th by contributing 5% of the EU budget, which was € 2.978 billion. Also, the total EU spending in Belgium is about € 7.358 billion. Belgium’s economy is highly vulnerable to the economic conditions of the EU member nations. Top 5 importers of Belgian goods are Germany, France, Netherland, UK, and Italia and these contribute over 57% of total Belgian export. The EU is already an essential part of Belgium's economy and after Brexit, the importance of the EU to Belgium's economy will get bigger than before.

Brexit

What is Brexit

Brexit, shortened for “British Exit,” is a term used to describe the United Kingdom’s decision to leave the EU. On June 23, 2016, approximately 17.4 million people participated in the referendum, and the result showed that 51.9% was in favor of leaving the EU. There are two main reasons why people voted for Brexit. First of all, people felt that they were losing their national sovereignty, and the EU was taking away their decisions. Being part of the EU, the United Kingdom had to conform to the regulations set by the EU. The second reason is that leaving the EU would allow the United Kingdom to retain its authority over immigration and border controls. The free movement of labor encouraged the number of immigrants in the United Kingdom to increase, which stirred discontent among the locals. The deadline for Brexit is on October 31, 2019.

Belgium’s Stand on Brexit

In 2017, the UK was the fourth highest importer of Belgian goods with 37.2 billion dollars. 11.8% of Belgium’s exports to the UK come from the pharmaceutical industry, and 30% of Belgium’s textile exports also go to the United Kingdom. These statistics emphasize the fact that the United Kingdom is an important country, especially in terms of trade, to Belgium and many of these favorable trade deals will be affected. Consequently, Belgium is against Brexit because there will be disruptions in the trade relations, and the two countries will have to implement new trade agreements, which would take a long time to come into effect. With the UK out of the EU, the cost of doing business with British companies will increase, and there will be many issues regarding regulations and trade barriers such as tariffs and quotas.

Brexit’s Effect on Belgium

On May 30, 2016, the British Pound Sterling to Euro was at 1.32 (Euro/Pound = 0.76). However, on May 31, 2019, the Pound to Euro exchange rate was at 1.13 (Euro/Pound = 0.89). These exchange rates illustrate the depreciation of the British Pound Sterling against the Euro, as the exchange rate decreased by 14.4% in 3 years. It is difficult to determine the exact cause of this depreciation of the Pound to Euro exchange rate; however, it is a combination of reasons that led to this phenomenon. Firstly, since there are many uncertainties of the future, many multinational companies will try to avoid doing business in the United Kingdom. The single market allowed firms operating in the UK to trade with other European countries without trade barriers. However, with the United Kingdom leaving the EU, these firms will lose their access to the Single Market. Some may even move their operations to another EU country to utilize the benefits of the single market. The demand for the British Pound Sterling will decrease, and the demand for Euro will increase. This will appreciate the exchange rate for Euro to Pound. Furthermore, with speculations that the Pound will depreciate, Pound-holders would quickly exchange their Pound for other currencies, which will further decrease the value of the Pound. Finally, the inflation rate in the United Kingdom rose to 2.1% in April 2019 from less than 1% in 2016. This higher inflation rate will depreciate the Pound, as the purchasing power of Pound decreases.

The depreciation of the Pound will put much pressure on the Belgian exporters because British importers will purchase less of Belgium-produced goods because the depreciation of the Pound will affect the competitiveness of Belgium’s producers. As a result, Belgium’s exports to the United Kingdom will fall. On the other hand, the deprecation of the Pound (or the appreciation of the Euro) will increase the relative attractiveness of British goods; thus, Belgium’s imports from the United Kingdom will increase. There will be an economic exposure for the Belgian companies because of the changes in the exchange rate. Economic exposure, a type of foreign exchange risks, emphasizes the effects on the company’s international profit when there are fluctuations in the exchange rate. Many international Belgian companies will lose profit and will show weaker growth, as sales to the United Kingdom decrease. Belgium’s current trade surplus of 16.1 billion dollars with the United Kingdom will start to decrease. With the decreasing exports to the United Kingdom, Belgium’s economic growth rate will also slow down.

SWOT Analysis

Belgium has several qualities that would be attractive to potential investors; however, with those qualities, there are also weaknesses to be discussed as one must consider investments from every angle to ensure quality return.

Strengths

In terms of strengths, its location is very beneficial: it has the second largest set of ports in Europe located at Antwerp, it is between the United Kingdom, France, and Germany whom are all major economic players, and, it is a member of the EU and several other economic organizations. When considering infrastructure for shipping and transportation purposes and potential customers, Belgium has both of these as it is well developed and has 500,000,000 consumers for a company’s market within its reach. For potential workforce consideration, Belgium has a high amount of vocational trainees due to its dedication to ensuring children finish school with a skill and numerous programs for training and apprenticeships. It is also a country with over 2,000 multinationals and great diversity, with three languages being the main spoken: Flemish, French, and Dutch. For a new product, this market is essentially perfect to test what works and does not work with certain groups. When considering if having such diversity is actually a weakness as opposed to a strength, Belgium’s societal emphasis on egalitarianism is what combats this as, even with cultural differences, one person is no different from the other. It also, as stated earlier, gives firms a very diverse pool of consumers to test with from a variety of different backgrounds. Belgium’s property prices are also quite low and it’s corporate taxes and trade restrictions are low as well.

Weaknesses

As attractive as Belgium is, however, it can not be without its faults, the most pronounced of which being its substantial reliance on the Western European economy. As a small country, 82% of its annual GDP is composed of exports to this region alone, which is clearly quite undiversified and subject to instability should the Western European economy fall - a trend we are seeing with Brexit in recent demonstration. One could consider this a volatile environment for starting a new venture; however, we believe it is an opportunity for growth more than ever before. There is a potential for great profits if done early on so that when such a fertile economy expands, a venture has already taken root. Other weaknesses include the substantial National Debt, which is about 99.95% of the annual GDP, the high level of structural unemployment, and the fact that almost all of its export products are intermediate products. A complex institutional structure, due to the fact that Belgium is using three different languages, is also a deterrent for potential investment as it may result in an elongated waiting time for a new firm or business partner to enter the market.

Threats

Typically, the next portion of the SWOT analysis would be the opportunities; however, since Belgium’s weaknesses also echo the threats, we have elected to cover this portion first. The aforementioned economic instability has been realized in the form of Brexit - the longer it takes the EU and UK to reach a deal, the more instability the deal generates. If a deal is not ultimately reached, Belgium’s economy is expected to contract nearly 1% which may sound minuscule in regards to a nation’s economy but is actually quite significant. Obviously, coupled with stagnating economic growth in recent years, this is not attractive and threatens to stall any potential investments. This threat is also largely due to Belgium being an intermediary as opposed to its own independent economy. The UK is 45% of Belgium’s market, as such this is the largest and most important threat to consider for Belgium when looking into potential investments.

Opportunities

The opportunities that we identified through our investigation of Belgium primarily relate to Belgium’s key position as a member of the EU. The EU headquarters is located in Brussels, making Belgium a location where essential decision makers of EU can be accessed. Another attractive implication is that Belgium has a very strategic logistics advantage, as the majority of trade conducted by the EU passes through Belgium’s multifarious trade ports. One concern to note is that this current ‘opportunity’ will lose some of its appeal should the United Kingdom exit the European Union.

Conclusion

Our SWOT Analysis shows that Belgium’s weaknesses and threats likely stem from it being an intermediary in many economic aspects. While these issues could be quite deterring, we concluded that it presents an opportunity for reworking and growth into an independent country. In addition, the instability associated with Brexit can serve as an opportunity rather than a threat, depending on how it is approached by foreign firms. This, coupled with all of the aforementioned strengths and opportunities, leads us to ultimately recommend Belgium as an attractive environment for foreign investment. Despite its small country size and fragmented language structure, Belgium has proven itself to be an influential country that lies at the center of European trade.