Threats to the Dow Chemical purchase of Rohm & Haas in the last days of 2008, largely resulting from a collapsed deal between Dow and Kuwait’s state oil company, reminded us of a chart we put together recently detailing global foreign direct investment (FDI) over the past 30 years.
We made three, perhaps obvious, observations about this data when we first looked at it back in October:
First, that’s a pretty steep trend line. The amount of money flowing across borders has been growing exponentially.
Second, it’s a relatively recent phenomenon. You’ll notice that FDI was relatively flat until the second half of the 1980s. So we’ve only been at this in a serious way for about 20 years or so, meaning there’s likely a whole lot we haven’t yet learned.
Finally, you can’t help but noticing the dip a few years back after the 2001 recession. Clearly FDI is not immune to broader shocks to the economy and the political environment.
It’s that last point that we were reminded of on hearing the Dow news. Is this an indicator of a broader, perhaps deeper, slowdown in cross-border investments as a result of the current recession? Do recessions really mean that companies should cut back on global investments? The answer: What we find is that while recessions are indeed accompanied by a slowdown in cross-border investments, the rebound coming out of those slowdowns is faster than you’d expect, and the amount of investment companies make across borders quickly reaches previously unthinkable levels. Let's take a closer look:
No Surprise, Cross-Border Investments Will Slow – For Now. When we zoom in on the past three recessions, we see that, overall, companies clearly cut back on global investments. The three lines on the chart below show outbound FDI numbers for each of the past three recessions (the last two of these fit the IMF’s definition of a global recession – less than 3% global growth). Pretty obviously similar dips in each case, with the only variation being their relative depth, as well as the amount of time needed to get back to the level of the year prior to the dip (e.g., 6 years in the case of the most recent recession and the 1980 – 82 recession; 3 years in the case of the 1990 - 91 recession).
So the dip is just as we’d expect, it’s real, and it’s consistent. No real news there; we should expect the same will happen in the current downturn.
Get Ready for the Rebound. The real question is, has the dip already happened? The rebound in global FDI began the first year after the downturn in the 1990 – 1991 recession, and two years later in the 2001 recession. What’s more, if we assume that the current downturn will exhibit similarities to one of the past three, the strength of the upward trend will bring total investments by 2014 to levels between 50% to 100% greater than 2007 levels in total dollar terms. That translates into between $3 and $4 trillion, representing between 1% and 2% growth in the ratio of global FDI to global GDP from 2007 levels (2007 ratio was 3.7%; 2014 projection would range between 4.5% and 5.8% based on Economist Intelligence Unit GDP growth projections).
In short, the most forward thinking companies might start increasing global investments as early as this year, and the amount of money flowing globally is set to hit unprecedented highs over the next few years. While high-profile events like the failure of the Dow/Kuwait deal may dominate the news, they may overshadow other signs of improvement.
Look to Developing Economies First. Drilling down into the inbound FDI numbers, the data also show that emerging economies are typically the first to exhibit recovery. In both the 1991 recession, and the 2001 recession, investment began growing in developing economies at least one year before developed economies saw positive growth (1992 vs. 1993 in the former, and 2003 vs. 2004 in the latter). In fact, in the case of the 1991 recession, investments never stopped growing in developing economies, that growth only slowed.
So three take-aways for executives based on these numbers:
1. Opportunities exist to lead the rebound, but it means acting soon. Companies that establish a solid footing in developing economies will position themselves well for the flood of investment that will flow as the global economy recovers. Stronger relationships, distribution networks, pricing advantages, and market positioning are just a few of the advantages to be gained from these counter-cyclical investments. As a rebound can happen as early as 2009, and no later than 2011, there is little time to wait.
2. Developing economies will likely rebound first. In the past two downturns, developing economies have exhibited an inbound investment uptick notably earlier than developed economies. Developing economies (and we include the BRIC’s in this grouping) are poised for a faster recovery on the heels of their strong currency reserves and higher potential growth local markets, and their position in many cases as production hubs for developed economies means money will flow to them first as developed economies begin to churn again.
3. Placing the right bets will be critical. Companies that manage their global footprints well are those that ensure decisions on where to operate and invest are not made in isolation within the organization, and contextualize the data and information that inform their decisions to their own long-term strategic interests, rather than short-term gains. Innovation and Operations Practice members can learn how Oracle Corporation and Sterling Commerce achieve these goals through the following links: Corporate Strategy Board; Logistics Leadership Board; Manufacturing Leadership Board; Procurement Strategy Council; Quality Executive Board; Real Estate Executive Board; Research & Technology Executive Council; Supply Chain Executive Board.
