Whether a global recession takes shape in the months ahead or not, count on continuing, substantial capital flows between the U.S. and Europe. Today's institutional capital seeks global diversification in any location with the right return potential, even emerging markets. How much more attractive the stable markets of Western Europe look in the wake of the Asian and Russian financial crises, which are classic emerging market investment lessons.

Jones Lang Wootton's September 1998 report, "European Property Investment: Key Facts and Issues for Investors," includes a special report on American capital trends by Tony Edgley, international investment director, and JLW Director David Marks. Both work in the firm's United Kingdom offices. The report identifies six U.S. capital sources driving real estate investments in Europe. They are: (1) U.S. pension fund capital being invested first in European equity and bond markets, with allocations to real estate markets likely to follow; (2) U.S. investment banks active in buying, lending and advising -- banks that were successful at such strategies as turning around portfolios of distressed assets in the USA are eager to replicate their success in European markets; (3) Opportunity Funds, or Private Equity Funds, seeking opportunities in Europe -- though much of their attention is now devoted to bargain-hunting in Asia; (4) real estate investment trusts looking for less expensive properties than what is currently available in the USA; (5) developers, mainly of U.S.-style entertainment complexes and factory outlet centers; and (6) hotel groups.

"Nobody could accuse the U.S. investors of being boring," write Edgley and Marks. "In the last 12 months alone, U.S. capital has found its way into countries from Sweden to Spain and into asset classes as diverse as shopping centers, hotels, car park portfolios, public houses, cinemas, mortgage portfolios, residential development sites, refrigerated warehouses and self storage. The spread of U.S. investments in Europe is so wide that, especially with regard to the opportunity funds, it is futile to try and pigeonhole or predict where this capital is likely to go next. Even the opportunity funds themselves do not know, as they are primarily deal-led and reactive to opportunities."

Multinationals Retrench
But one can track which countries, regions and cities are benefiting from expansion strategies of multinational corporations. A valuable source of information in this arena is the European Investment Monitor, a database developed and maintained by Ernst & Young's International Location Advisory Service. In July 1998, The E&Y division, in conjunction with The Economist Intelligence Unit, released a study of key strategic factors influencing expansion and new facility decisions, called "Choosing Your European Business Location."

Among other findings, the report makes the case that multinationals are retrenching and determining which products and services they will market and support in the rapidly changing European marketplace. Results of this process include: global management by product and service lines and the diminution of country line management responsibility; increased integration across national borders; a focus on core competencies, outsourcing and third-party provision; supply chain integration; the development and implementation of common technology systems platforms; technology driving as well as enabling change; and the consolidation of functions across major geographic regions and the emergence of shared service centers.

"Reconfiguration affects where activities are undertaken," the report points out. "Regions across Europe have benefited from and been adversely affected by these changes. The impact of 'where' has made inward investment a major driver of change to the economic landscape of Europe. It has assisted the transformation of regions."

Specifically, the report highlights several regions that are emerging as centers of expertise for Europe as a whole. These include:

• Greater Dublin: "a significant European center for service activities"
• Katowice, Poland; Czech Republic; Catalonia, Spain; South Wales; Alsace/Lorraine, France: "substantial concentrations of automotive assembly and/or components"
• Denmark: "significant growth in telecoms, distribution and regional service centers"
• The Netherlands: "a center for European distribution and HQs"
• Rhone-Alpes: "a center for pharmaceuticals and medical components"
• Toulouse, France: "significant aerospace activity"
• Sophia Antopolis/Nice: "an established high-tech center"
• Ireland, Wales and Scotland's "Silicon Glen": "electronics centers"

The star industrial sectors in Europe are software; chemicals; automotive (assembly and components); electronics; finance and insurance; office machinery and computers; and food and drink. Activity in these sectors tends to gravitate to geographic clusters in or near those regions listed above, although the report draws attention to significant projects under way in many other European locations, as well.

New Europe Strategies
Capital flows to Europe today are likely as robust or more so than when the report was compiled, given investors' tendency to seek stable markets in periods of volatility. The Russian financial crisis in the summer of 1998 indicated in no uncertain terms that the economic crisis was malignant -- the $64,000 question in the fall was: Would Latin America be next? "There is a market for goods and services in Europe, though the competition may be stiff," observes Richard K. Greene, a member of Moret Ernst & Young's International Location Advisory Service, in Utrecht, the Netherlands. "You have populations with fairly high levels of expendable income; they are developed societies, and companies can do business in Europe, because a rule of law has existed for some time. In fact, the European Union has, in a sense, saved itself by creating a wider economic unit that can better compete with other areas of the world. And the monetary union makes it even more attractive, because you can reach a large customer base from fewer points of presence with fewer barriers."

A more compelling question for companies considering European expansion strategies is whether to site projects in countries within the EU umbrella or in one of several markets slated to join but not yet subject to EU bureaucratic controls. These markets include Poland, the Czech Republic and Hungary. "These countries have fairly good potential for joining the European Union, but they would have two advantages -- somewhat lower costs and a little more unemployment and they are in Eastern Europe," says Greene. "A lot of the manufacturing industries would be very attractive to these areas," and to foreign direct investors in general, he adds.

But even these regional considerations, crucial as they are to specific expansion strategies, will soon give way to more global considerations.

"Automobile component manufacturers are being mandated by the assemblers to be worldwide suppliers," Greene relates. "These medium-sized companies are stretched trying to be a global supplier with just a percentage of the volumes the assemblers do in terms of sales. They have to look at the whole world, and how they serve their major customers around the world.

"It becomes a question of global capabilities, setting priorities, and determining how to serve your customers on such a broad basis," Greene continues. "They have to balance the need of the assembler who is in Europe already, but is also in Latin America, Asia and North America."

Applying limited technical, financial and other strategic resources globally is the key challenge for these organizations in the new millennium. SS

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