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Switzerland’s Business Environment and Investment

Executive summary

Switzerland is a European country that ranks among the richest in the world based on metrics such as GDP, per capita income and rates of inflation as well as unemployment. Its geographical location opens it to other countries and connects them for more effective trade. According to the World Bank, Switzerland has a GDP of US$701.0 billion and a population of 8.19 million people. It is an attractive destination for direct foreign investment because of its stable economic, political, and legal systems.

It has numerous incentives that attract foreign investors. On the other hand, Switzerland has numerous laws that support the establishment of business enterprises through reduction of bribery and corruption. Effective tax incentives, political stability, protection of intellectual rights, numerous trade treaties with other countries are other reasons to invest in Switzerland. All the actors contribute toward making Switzerland an attractive destination for foreign direct investment.

Introduction

Switzerland is a European country that borders with Italy, Germany, Austria, and France. According to the World Bank, it is among the richest countries in the world based on aspects such as governance, transparency, economic stability, human development, nominal wealth, and per capita income (Usa, 2010). Its GDP has grown significantly over the last decade thus making it a global financial haven and a destination for foreign direct investment.

The main reasons for investing in Switzerland include economic prosperity, an effective and efficient legal system, and political stability. The country’s taxation system offers numerous incentives that make the foreign investment viable. For example, the Securities Law, the Swiss Code of Obligations, and the Cartel Law are examples of legislation that make the country’s legal system effective, efficient, and competitive (Usa, 2010).

Other factors that make Switzerland an excellent investment destination include great infrastructure, pro-business environment, and highly trained and educated labour force. Switzerland creates a favourable business environment by being a member of international trade treaties such as the World Trade Organization (WTO), The Organization for Economic Co-operation and Development (OECD), and Bilateral Investment Promotion and Protection Agreements (BITs) (World Development Indicators, 2016).

The main objective of this report is to conduct a political economy analysis of Switzerland to determine its effect on foreign direct investment. In that regard, the report will compare three different systems (political, economic, and legal) by exploring their benefits, risks, and costs. The report will also include recommendations regarding the country’s attractiveness to foreign direct investment.

Political economy analysis

Political economy refers to the relationship between trade and law, as well as the distribution of national wealth (Harrison, 2013). For production and trade to benefit a country economically, there is a need for laws, customs, and good governance. In the contemporary business world, the term refers to studies that combine concepts from different fields that include economics, political science, sociology, and law intending to explain how political institutions affect a country’s economic system (Harrison, 2013). Political economy will be used to analyse Switzerland because it offers an effective framework for studying the interplay between the country’s economy, law and politics. Also, the framework is critical in the study of how public policy is created and implemented concerning foreign investment.

Political system

The Swiss political system is favourable for foreign investment because of its stability. Its political system is a form of federalism that provides each of its cantons with political self-determination and direct democracy that allow people to express their views (Sell & Gugel, 2003). Political stability also emanates from citizen’s right to have a say in the country’s political matters. Swiss politics are characterised by stability, neutrality, and consensus (Sell & Gugel, 2003).

Exemption from EU membership means that the government is free from external control and manipulation. The main risk of the Swiss political system is its exclusion from EU, EEA, and NATO memberships (Sell & Gugel, 2003). Exclusion from such memberships denies it certain advantages that member states enjoy. Despite that, most of its regulations are in-line with those of EU and other organisations. Another risk is the enactment of legislation to place restrictions on immigration. A 2014 referendum introduced several restrictions on immigration thus placing pressure on the country’s relations with the European Union. This pressure can have adverse effects on foreign investments in the country because placing restrictions on freedom of movement violates numerous bilateral treaties that promote free trade. The costs of foreign investment include restrictions on immigration and strained relations with other countries.

Economic system

The benefits of the Swiss economic system include stability, high GDP, and rapid growth and development. Switzerland has a GDP of US$701.0 billion that is computed against a low population of 8.19 million people (World Development Indicators, 2016). There is high private consumption, low rates of unemployment, and significant wage increases.

Inflation rate in Switzerland: 2012-2015.
Table 1: Inflation rate in Switzerland: 2012-2015 (Yaros, 2016).

Economic stability emanates from effective secrecy and monetary security policies, accessible and great infrastructure network, and numerous trade agreements with the European Union (Trampusch & Mach, 2011). The financial sector is highly developed, the economy is integrated with Western Europe, and Switzerland has gained a strong reputation as a global financial hub.

GDP growth: 2006-2014.
Figure2: GDP growth: 2006-2014 (Switzerland GDP, 2016).

The major economic risk is slow economic growth and overvaluation of the Swiss Franc. The recent appreciation of the Swiss Franc against the euro has resulted in low economic growth thus creating an unfavourable environment for foreign investment (Trampusch & Mach, 2011). Other economic risks include high housing prices and household debt, highly concentrated banking sector, uncertainty concerning immigration policy, and overdependence on financial services and trading (Trampusch & Mach, 2011).

The Swiss legal system is very effective because it discourages corruption, protects property rights, applies similarly to local and foreign investors, and facilitates the establishment of businesses (Breiding, 2013). Some laws offer tax incentives and as a result, attract foreign investment. Rates of corruption and robbery are very law because of the effectiveness of the legal system. Its liberal employment law encourages freedom of action and deregulation, factors that favour foreign investment (Breiding, 2013).

Risks include strict environmental protection and human rights laws that compel companies to put certain measures in place especially in the manufacturing sector. Such laws increase the cost of doing business. The major cost is high overheads in production because the implementation of certain laws involves additional costs that do not support the bottom line of companies.

Political economy analysis table.

Political economy analysis Benefits Risks Costs
Political system Political stability
Consensus
Neutrality
Exclusion from EU membership
Freedom from external manipulation
Exclusion from EU, NATO, and EEA membership
Restrictions of immigration
Strained relationships with the EU
Reduced business opportunities
Economic system High GDP
Great infrastructure
Low unemployment
High consumption
Slow economic growth
Overvaluation of currency
High housing prices
Concentrated banking sector
The high cost of doing business
Legal system Protection of property rights
Tax incentives
Low bribery and corruption
Liberal employment law
Strict environmental protection law
Human rights laws especially for workers
High wage policy
High costs of production

Recommendation

Switzerland has stable economic, political, and legal systems that make it a good choice for foreign investment. The stability, effectiveness, and efficiency of these systems lower the risks and costs of foreign investments in Switzerland (Kalin, 2011). On the other hand, a stable economic system facilitates the continuous growth and development of the foreign investment. Switzerland has numerous incentives that attract foreign investors and make it an investment destination of choice (Kalin, 2011).

Conclusion

The overall attractiveness of Switzerland to foreign investment is based on the stability of its political, economic, and legal systems. There are very low political, economic, and legal risks that can deter the growth f businesses. Therefore, Switzerland is a good destination for foreign direct investment. Low costs and risks coupled with highly stable systems create an environment that is conducive for the establishment and growth of businesses.

References

Breiding, R. J. (2013). Swiss Made: The Untold Story Behind Switzerland’s Success. New York, NY: Profile Books. Web.

Harrison, A. (2013). Business Environment in a Global Context. London, England: OUP Oxford. Web.

Kalin, C. (2011). Switzerland’s Business & Investment Handbook: Economy, Law, Taxation, Facts, & Figures. New York, NY: John Wiley. Web.

Sell, M., & Gugel, M. (2003). The Swiss political System and Local Government. New York, NY: GRIN Verlag. Web.

Switzerland GDP: 1960-2016. (2016). Web.

Trampusch, C., & Mach, A. (2011). Switzerland in Europe: Continuity and Change in the Swiss Political Economy. New York, NY: Taylor & Francis. Web.

Usa, I. (2010). Doing Business and Investing in Switzerland Guide. New York, NY: International Business Publications. Web.

World Development Indicators. (2016). Web.

Yaros, B. (2016). Switzerland: Detailed Economic Analysis, Indicators and Forecasts. Web.